Succession issues in farming partnerships
This quick guide explores the effect on a farming partnership of the death or retirement of a partner, and discusses the merits of putting in place a partnership agreement.
It is in the nature of farming partnerships that they are often run by family members or for the benefit of families. There is often a reluctance on the part of the family to document the arrangements between them and, although tacitly agreed to by the partners, they can be very fluid.
There are risks associated with adopting this approach, not least when it comes to the death or retirement of a partner and the effect this has on the partnership in the event of a partner’s death or retirement.
Where no written partnership agreement exists, the partnership will be governed by the terms of the Partnership Act 1890 (“the Partnership Act”) which provides for a partnership to dissolve and be wound up on a partner’s death or retirement.
In practice, what normally occurs is that the partnership, rather than being wound up, continues. This leaves open the question of what happens to the outgoing partner’s share or interest in the partnership.
The recent case of Hopper v Hopper has confirmed the courts’ approach to this situation and the effect of section 42 of the Partnership Act. The Court of Appeal in that case confirmed that, although dissolution of a partnership is deemed to occur on death or retirement, this does not extinguish the rights of the outgoing partner or his estate to a share in the profits of the partnership following dissolution. In that case, the court held that, as the accounts of the partnership prior to dissolution had shown, the deceased partner was entitled to 25% of the profits of the partnership (although these were not drawn by him and were credited to his capital account) and he continued under section 42 of the Partnership Act to be entitled to a 25% profit share for the use of his partnership assets.
Given this and other cases, if it is not the intention of the partners for a deceased or retiring partner to continue to receive his profit share following death or indeed if the partners intend that a partner’s share in the partnership should be acquired by the continuing partners, it is essential for a partnership agreement to be put in place detailing these intentions.