Preparing a written Partnership Agreement which defines the parties, the partnership intention and the assets to be used, can be so helpful to record the agreement and should be an essential part of any rural business planning [see Lord Hoffman in IRC v. Gray (Survivors of Lady Fox) 1994 STC 360]. Unfortunately this often is not what happens in practice (see Hadderfield v. Hadderfield  EWHC 317, James v. James  EWHC 43 (Ch), Davies & Davies v. Davies  EWCA Civ, Moore v. Moore  EWHC 2202 and Ham v. Ham  EWCA Civ 1301. Then it’s second run in Ham v. Bell & Others  EWHC 1791 (Ch). More recently Wild v. Wild & Others  EWHC 2197 Ch.
1. There are considerable risks in not preparing a proper Partnership Agreement where one is intended or if not intended making that equally clear but that exercise needs to be more than just finding a precedent and filling in the names. See Midland Bank Trust v. Hett, Stubbs and Kemp  1Ch 384.
2. If one is, agreeing terms in a Deed signed by the parties to it. The Deed should be clear what land or assets are included within the partnership or property more likely excluded with the land owners right to regain vacant possession within twelve months if required (see Harrison v. Broadley-Smith 1AER 897 at 1964). Of the many recent cases the two cases of Ham v. Ham, then Ham v. Bell & Others (on whether the land was a partnership asset at all) (see below) make clear.
3. There are large books on the law of partnership and/or partnership deed preparation. This short paper is not intended to compete with them but where I have referred to a case or statutory authority I have tried to use the “neutral citation” so they can be found at little cost with access to the internet.
4. In practice and in so many cases, mum and/or dad are reluctant or unwilling to make their intentions clear often with the words that their children can sort things out when the parents have died. But there are lifetime changes which need to be thought of before they happen, such as in Ham v. Ham or after the first parent dies or between the siblings on death which can be very expensive and should be avoided if they can (see Davies & Davies v. Davies and James v. James both of which expensively involved the law of proprietary estoppel). It must be remembered that a Will can be challenged and in any event only speaks from death.
B. PARTNERSHIP LAW
5. The reality is acquiring land either by purchase or rent (even if available) in most rural areas is so expensive that often more than one person will want or need to share expense of purchase or acquisition. Or once obtained it will need the work of more than one person. This prompts (ignoring Share Farming and Contract Farming) (both will be taken separately and although there are other structures available) the thought of partnership.
6. The old Borough Courts and “pie powder” of the Middle Ages attempted to deal with disputes between merchants. However, just like we British regard fish and chips as a British dish, although in truth it came from France, so partnership law can more accurately be traced to the Italian Merchants Law and the 1600’s (see the old book now difficult to obtain called Holdsworth “A history of English law”). Although there was an Act in 1865 (passed for a specific purpose) the Act which is still used and available on the internet is the Partnership Act 1890 (“the Act”). So beautifully written it was nevertheless declaratory of the law which existed at that time or as Section 46 of the Act said “the rules of Equity and Common Law applicable to partnership shall continue in force except so far as they are inconsistent with the express provisions of this Act” (see also Lord Herschell in Bank of England v. Vagliano Brothers  AC 107 at 145).
7. Under Section 1 is “partnership is the relation which subsists between persons carrying on a business in common with a view of profit”.
8. Sharing intended profits and property is merely evidence of a partnership but not conclusive. This is particularly important for the drafters of Share Farming and Contract Farming arrangements in which the Land Owner will not want either. Section 2 (2) and 2 (3) of the Act provide “the sharing of gross returns does not of itself create a partnership, whether the persons sharing such returns have or have not a joint or common right or interest in any property from which or from the use of which the returns are derived .. the receipt by a person of a share of the profits of a business is prima face evidence that he is a partner in the business, but the receipt of such a share, or of a payment contingent on or varying with the profits of a business, does not of itself make him a partner in the business …”.
Nor did this section affect or change the old law (Davies v. Davies  1 Ch 393).
9. Under the Act “profits”are interpreted as the amount of gain made in the business each year.
10. Whilst within partnerships it is agreeable for the partners to agree in advance that if there is a loss those losses do not need to be divided equally although “both the partners are liable to third parties, but as between themselves the partnership accounts must be taken in accordance with the agreement” (see Walker West Development Limited v. Emmett ).
11. But both partnership and people change in time. So may the assets within that partnership used or owned. There are, therefore, at least four times when this can create an issue:
(a) on the introduction of a new partner who may not bring assets in to the partnership, just hope and effort
(b) or the retirement of one
(c) on the sale of capital assets which have been used by the partnership and may either belong to it or to one of the partners within the partnership and
(d) if there is a lifetime sale whether the proceeds belong to the partners or one of them (see below).
C. PARTNERSHIP PROPERTY
12. One of the issues in Ham v. Ham (above) was the ownership of property used by the partnership and how to value it. Part one of this unhappy dispute within the family started in Ham v. Ham  EWCA Civ 1301. The case involved a farming family north of Newton Abbot. Mother and father had farmed for years before admitting one of their sons to farm with them. A farming partnership was agreed. They worked well and hard together with mum and dad growing old. Then something not intended happened. They fell out and son wanted to leave taking with him that which was his. The farmland had appeared in the Accounts but that was a holdover from the original Partnership Deed between mother and father. The consequences, it was thought, would be that at a time in life when they could not afford to do so a significant payment would have to be made to son and how that should be valued. Part two of the same dispute came in Ham v. Bell reported two years later. One side of the family had worked out that the farm land had been kept in to the old partnership transferred to the new. However, as the Judge said “the Accounts of a partnership may provide evidence as to whether there was an express agreement to make land a partnership asset. If one partner says there was an express agreement and the other denies it, the Accounts may help the Court to decide whose recollection is more reliable”. But in this case it was not intended by the parents that all their land should be a partnership asset even though included in the Accounts. This may be relevant not only on death or retirement but on a sale of part, save for development. In many Partnership Agreements there would normally be some provision that the land which the partnership used would remain in the ownership and control of the owning partner but with a lease (of some sort of other) in favour of the partnership (but see Inheritance Tax below).
13. Separately in relation to any land or asset purchased by the partnership Section 21 of the Act will normally apply as follows:
“unless the contrary intention appears, property bought with money belonging to the firm is deemed to have been bought on account of the firm”.
This could be:
(i) all property originally brought in to the partnership stock and/or
(ii) all property acquired either by purchase or otherwise on account of the partnership or for the purposes of the partnership business.
Reported cases are often life examples on what or what not to do. In Wild v. Wild  EWHC 2197 Ch Mr. Wild owned a farm and a bungalow. He later started farming with his son. The issue was whether the farm became a farm partnership asset. In this High Court decision it was held it was not. Further, even putting it as a partnership asset in the accounts was not necessarily going to change that position but something to consider when estate planning.
14. Separate to this the partners must consider the potential effect of Section 33 of the Partnership Act which provides “33 (i) subject to any agreement between the partners, every partnership is dissolved as regards all the partners by the death or bankruptcy of any partner. (ii) a partnership may, at the option of the other partners, be dissolved if any partner suffers his share of the partnership property to be charged under this Act for his separate debt”. This may not be what the partners either intended or planned but as the Act itself provides the partners can agree a different arrangement.
D. LIFETIME DISPOSALS, PURCHASE AND SALES
15. When a partnership (particularly a farm partnership) holds or uses a partners land there are always a few practical issues to consider including:
(i) whether the farm holds too much or too many investments beyond mere farming and if so the tax effect
(ii) whether any of these fall outside the base business and if so why
(iii) and if in so doing, they extend beyond normal farming operations turning the partnership in to an investment business
This usually requires some time to consider what is replaced on the Accounts and why. It may be (as suggested in Ham v. Bell) that this may require separate advisors. There may be a need for leases or tenancies within the partnership.
16. Although I have written more in relation to sales and capital gains tax (CGT) and inheritance tax (IHT) one thought before development or sale of development land is whose land is it? Or whose should it be? This may be more of a thought following the NPPF No. 2 issued July 2018. Remember that CGT entrepreneur’s relief requires:
(a) cessation of partnership property and
(b) withdrawal of non-partnership property.
This requires (as Ham v. Bell makes clear) some thought.
17. If there is a sale and it is agreed whose money it is this should trigger consideration of the Sections 152 – 160 of the CGT Act and rollover relief, particularly where it is linked to replacement property. Remembering that that should be twelve months before the sale or within three years after.
18. More details are contained in my separate work on Capital Gains.
All partnerships will come to an end one way or another if only on death (see below). Section 32 of the Act identifies the first three reasons for dissolution, namely:
(a) where there is a fixed term partnership that term has expired
(b) where the partners have agreed to work on a single adventure or undertaking on the termination of that adventure or undertaking and finally
(c) if entered in to on a undefined time by any partner giving notice to the other or others of his intention to dissolve the partnership.
19. Section 33 raises two more:
(i) death or bankruptcy of any partner and/or
(ii) where one of the partners suffers his share in the partnership property to be charged.
20. Section 34 of the Act finishes off confirming that a winding-up can take place where an illegality occurs makes the partnership business or operation unlawful.
21. Clearly most parties will negotiate so there will be no need but Section 35 of the Act does give a Court the right by decree or dissolution to dissolve the partnership. The way to do this would be normally under Part 8 of the Civil Procedure Rules and in the Chancery Division and in the following cases:
(i) where a partner other than the partner suing becomes in any other way permanently incapable of performing his part of the partnership contract
(ii) where a partner other than the partner suing has been guilty of such conduct as in the opinion of the Court, regard being had to the nature of the business, his calculated to prejudicially affect the carrying on or the business
(iii) where a partner other than the partner suing wilfully or persistently commits a breach of the Partnership Agreement or otherwise so conducts himself in matters relating to the partnership business that it is not reasonably practicable for the other partner or partners to carry on the business in partnership with him
(iv) in the business of the partnership can only be carried on at a loss
(v) whenever in any case circumstances have arisen which in the opinion of the Court render it just and equitable that the partnership be dissolved (Section 39).
22. For most rural businesses the very thought of proceeding with litigation under the Partnership Act will be regarded with fear and understandable worry about the cost. If there is no provision within their Partnership Deed it could well be the partners rather than avoid the cost will wish to take three simple steps by agreement:
(a) informing HMRC in the setting up of a fresh partnership with the continuing partners
(b) instead registering themselves as self-employed and/or
(c) opening a new bank account in their own name or in the name of the continuing partnership which would, of course, with farming partnership require notification of the RPA that they have created a new business filling in the relevant necessary forms.
F. DEATH AND AGRICULTURAL PROPERTY RELIEF
23. APR is given on the value of the agricultural property occupied for agriculture by the owner at least two years or by him or another (Sections 115 and 117 of the IHTA 1894).
24. Relief will normally be 100% of the agricultural value applying Section 116 IHTA 1894.
25. Under the Partnership Act the death of any partner brings the partnership to an end. The Partnership is dissolved and the partners should immediately stop trade. In favour of the deceased’s estate the partnership assets should be sold at the best price from which partnership debts wold need to be deducted in accordance with the Act or the partnership agreement. With a family farm enterprise this may not be what the survivors or the deceased family planned or wanted or the survivors when placed in this situation could afford.
G. THE TYPICAL RURAL BUSINESS PARTNERSHIP DEED
When faced with the above some might wonder why bother at all. But there are provisions which the parties might consider which may reduce the risk of dispute or the need for Court proceedings, namely:-
(i) Where the request or requirement is to add or admit a new partner in to an existing business. The simpler solution where there is an existing Deed with rights and obligations to simply draft a “Deed of Adherence” where there are current long standing obligations or rights which the new partner will be accepting or agreeing with the older partners that he need not accept or follow
(ii) similarly when new partners are being introduced there may be some question as to what assets of the partnership are to be regarded as assets of the new partnership and/or what assets are not. In addition what profits are to be regarded as joint profits and those which are not
(iii) sometimes it may well be sensible instead of simply joining a new partner in to a partnership to consider at this stage a diversification where the business itself has developed and is now much more than a simple farm business. For example, there are now property lettings or other operations (as in Farmer (Executors of Farmer) v. IRC  (STD) 321 or Brander (Rep’s of the 4th Earl of Balfour) v. HMRC  STC 2666). This may lead to some question as to what assets rightly or wrongly should be included in the balance sheet and what assets are to be enjoyed by the partners personally, at what personal or partnership cost and for how long?
(iv) all partnerships have a term. Most farming businesses, particularly those involving animals, but also those in horticulture where it will take some time for a financial return to be obtained for new buildings should evolve a discussion of the time under which the partnership should as a minimum time last
(v) although with a complete partnership it should always need an update or review. Some of the farm land may be developed or have development potential. If so, before advertising it For Sale and it is sold it would be sensible to consider whether the land will attract 100% or 50% BPR. Then there is how Section 33 of the Partnership Act may operate. The issues in Ham v. Ham, Davies, James and Gee all need to be considered.
(vi) each business require capital which for the older partner will involve issues of repaying any loan or how his/her estate will receive payment on his/her death and whether his/her estate will be potentially liable for any borrowing taken out by the Bank
(vii) it must be remembered that with a partnership profits and losses need not be divided equally. Some new partners coming in may do more work and slowly their capital in the partnership might increase
(viii) with a new partner coming in there needs to be some thought as to those assets already in the partnership and whether the new partner should be sharing in those assets or they should be limited to those partners who worked and built them up
(ix) with discussion with the Accountant some thought be given to the calculation of profit and loss and its allocation
(x) which may well lead down to drawdowns of capital and income. The youngest will probably have a family to feed and greater needs than the eldest but will that be fair?
(xi) each partnership will have Accountants, Financial Advisors and very likely nowadays farm advisors. A change in a partnership could often require a review of who and at what cost the partnership is to be advised
(xii) time spent in the partnership should also be considered. Often the whole idea of introducing younger partners is so that the older ones take holidays they may never have had or they may simply not have the energy left which leads to
(xiii) the issue of retirement itself which with property owning partners may not be attractive if they wish to protect their APR or their successors want them to
(xiv) having mentioned above the Court process of dissolution there are arrangements and there can be provisions made within the partnership to avoid this
(xv) most Partnership Agreements start with everyone being happy but sometimes life can change. Therefore it is sometimes wise for there to be a provision for Mediation and
(xvi) when one partner leaves it may well be that the others simply cannot afford immediately to pay out. Therefore some thought should be given in advance to what if this happens (and it may be the youngest not the oldest) how is payment on retirement to be made and is it with interest and over how many years? Within this discussion thought to whether the partnership should be taking out as a partnership expense life cover and medical insurance, although for many this will be one cost too many for the farming partnership
(xvii) as so many farms now cannot pay its debts or expenses without Entitlements, there needs to be clear discussion as to who will own the Entitlements and who is to take the benefit of them during the course of the partnership.
H. THE CASES WHEN THINGS GO WRONG AND ESTOPPEL
26. Decided cases are always expensive for those involved both emotionally and financially whatever the outcome. They do, however, provide important lessons for those not affected. The following are a number of recent cases all mentioned above as follows:
(i) The case was ultimately dealt with under the law of Estoppel (see below), such a nightmare was Davies & Davies v Davies  EWCA Civ 64 (7).
Facts: The Cinderella case. This case involved a dairy farming family in South Wales. The outcome was probably unsatisfactory for both. The costs must have been considerable. It involved proprietary estoppel. Mr and Mrs Davies both now in their late 70s bought Caeremlyn Farm in 1961. They increased their holding by 55 acres in 1965. In 1968 they had their second daughter Eirian (E). In 1972 Mr and Mrs Davies purchased a neighbouring farm and 179 acres. In 1982 another 24 acres. In 1991 another 68 acres and in 1997 a neighbouring farm together with 147 acres. E had an elder sister who helped on the farm until she married 1988. It was by then (1988) that it was clear of the three girls on E wanted the farm and it was Mr and Mrs Davies wish that one of their children would take on in succession. Like all family’s they had their moments and over the years E was told “not to kill the goose that lays the golden eggs” and that the farm would be hers one day. In return she worked long hours for no wages but pocket money and the use of a car. In 1989 she left the farm after an argument and shortly afterwards married. There was a reconciliation of sorts before E was married and she returned to the farm.
However Mr and Mrs Davies had their reservations about E’s husband. In 1997 there was talk of a farming partnership. One was drawn up and E signed it but her parents never did. It was not until 2001 whilst pregnant E was kicked by a cow which precipitated another argument within the family. It was then she discovered she had not been made a partner in the farm business but she continued to work on the farm.
In 2002 Mr and Mrs Davies made Wills leaving the farm one third to eldest daughter, one third to youngest daughter and one third not to E but her daughter in trust. In 2004 E’s marriage broke down. In 2007 she returned to the farm. In 2008 Mr and Mrs Davies met a solicitor to discuss the formation of a farm business company and intended to issue 49% of the shares to E but nothing came of this. The judge found E left her other job to work full time on the farm on the basis of that promise. In 2009 Mr and Mrs Davies showed E draft Wills in which E was to given the farm but they were never executed. The judge found there was no promise given but that was an indication of intent. In 2009 a new milking parlour was installed and at its opening comments were expressed by Mr and Mrs Davies to be for E’s benefit. In 2009 solicitors were called to review Wills. At this time thought was to place the farm and farm business into a discretionary trust. E found out about this and was unhappy. In 2010 Mr Davies made a new Will and it was shown to E who was unhappy with its terms and apparently said “stick it where the sun doesn’t shine”.
By August 2012 after a fight E left the farm but continued to live in one of the farmhouses. Proceedings were started by Mr and Mrs Davies for E’s eviction which inevitably led to this case. The judge found that promises had been made by Mr and Mrs Davies to E over a period of time on which she relied and on that basis at first trial awarded her a lump sum of £1.3million. There was at first appeal which failed and then the current one. The issue was not whether E should get nothing but the amount she would get.
Held: The Court of Appeal reduced the amount to what it thought it should be. At that time there was a valuation of one of the farms at £300,000 and on that basis the award was reduced to £500,000. The issue of costs is not clear from the judgment.
(ii) It has never been the function of the Court of Equity to prove one man’s bargain see Ham v CA Civ 1301(8)
This case involved a farming family close to Newton Abbot. Mr and Mrs Ham were dairy farmers with a viable 400 acre farm, farm machinery and a valuable milking herd though as Lord Justice Lewison observed as dairy farmers they were asset rich and cash poor. He further recognised that building an established herd was a lifetime’s work of careful selective breeding which of course be dispersed in just one afternoon by a qualified auctioneer. In 1997 Mr and Mrs Ham took their son John who was then 19 and had no assets into partnership. Accountants were instructed to prepare a partnership deed but there was an error in it. The error was to fail to define whether on dissolution a book value of the assets be taken as the value or the “net value” which would have required a revaluation of the assets in the account. The report does not recite what caused the unhappiness but son left after a number of years and sought winding up of the partnership. The importance of this for Mr and Mrs Ham senior was that if there had to be a revaluation of the assets would be more at their age than they could afford to pay out without breaking up the farm. If John’s interpretation of the Deed was correct then it would also have landed him with a “windfall”. At first instance the judge found for parents. However and with the greatest reluctance the Court of Appeal found for John and a revaluation. It did so on the basis that it was not open for them to reinterpret the grammatical wording of the partnership deed no matter how much they might have wanted to.
(iii) In the same year another farm enterprise case this time in Wiltshire was Moore v Moore  EWHC 2202 (Ch) (9)
This was a case involving another farming family this time in Wiltshire which had been in the same family for four generations. It was a successful arable farm of 650 acres previously run by father and his brother with about £10 million worth of combined assets. The claimant was Mrs Moore acting in her capacity as deputy for her husband who had Alzheimer’s. There were issues between her and her son. Her son was the defendant. The farm company was the second defendant. Curiously uncle had given his half of the farm to the son and thought if his brother had capacity his brother would have done the same. The court found after listening to witnesses that a promise had been made to the son as a result he had worked long hours in the business in reliance of that promise. His claim for proprietary estoppel succeeded. The costs of these cases are always considerable and the emotional turmoil should not be underestimated.
27. These cases and many others simply prove the problem of not either having a Partnership Deed or not refreshing one.
David Hassall LLM MSc Email: David.Hassall@hassall.law and Telephone (01548) 854878
Fellow of the Agricultural Law Association
Hassall Law Limited