The dangers of agreeing farming partnerships on a handshake
Partnership agreements are commonplace in the agricultural sector but these are often unwritten or not kept updated.
Most farming partnerships are formed within farming families, relying on little more than a handshake or a promise.
Going into partnership offers a variety of benefits including tax relief but it is vital that partnerships are well documented so that, should something happen, there are no surprises, particularly relating to the ownership of the farm.
Farming partnerships can be problematic if they are either left unwritten or go out of date.
Flash points including death, divorce and dispute can cause a difference of opinions in terms of what should happen to the farm. By leaving partnerships undocumented, farmers put themselves at the mercy of archaic laws such as the Partnership Act of 1890.
Partnerships therefore need to be properly documented and this should be a living, breathing document that is tailored to each specific farming family.
One important consideration when thinking about formally documenting a partnership is property.
Clarity of ownership is needed as the history of ‘how land was acquired’ and ‘who are the beneficial owners’ can easily become cloudy. This is because proof of beneficial ownership might not be clearly documented or understood between the partners. The partnership accounts might suggest one thing, but the title documents and the understanding within the family may be very different. Alignment of understanding of beneficial ownership of the land upon which the partners carry out the business of farming is key. It’s not uncommon for this to be overlooked as the partners focus on the day to day business of generating a profit.
The first simple step is for the partnership to keep copies of all title deeds and documents, and check that the ownership is aligned with the partnership accounts and the partnership agreement.
If one partner wants to retire then a succession plan needs to be put in place. A well written partnership agreement will include provisions dealing with retirement and clearly set out how a retiring partner’s share is to be valued and paid out – perhaps over a number of years so as to allow the continuing partners to raise funds and continue farming.
Often, the most difficult part of succession planning is opening the conversation. Implementing a family charter is one way of clarifying expectations around succession planning. The importance of understanding the concerns and the desires of each partner is not to be underestimated in the sense of health and happiness for individual partners and their families, and the future success of the business. As a starting point, it is useful to talk about the short, medium and long term expectations of each partner.
By simply communicating with each other, a lot of disputes can be avoided by ensuring all parties are on the same page in the first place.
Court proceedings over claims to an estate can cause distress, uncertainty and huge legal fees for all parties involved. To avoid this outcome, it is important for farming families to communicate well with each other and document the terms upon which they are in business.
When it comes to a farming partnership, business and family are usually unavoidably linked, and when the value of the capital asset of the land is added into the mix, this can be the recipe for harmony or disaster. Investing in a well written farming partnership agreement is an essential part of achieving alignment within the family and business and planning for the future.
If you would like help and advice regarding farming partnerships then please contact Catherine Harris.
Contact Catherine to discuss this further.
