When a partner leaves the partnership, it is important that the terms which have been agreed relating to their departure are documented. This is normally set out in a Deed of Retirement.
Deed of Retirement
Due to the level of formalities that need to be dealt with, a Deed of Retirement will often be a comprehensive document drafted specifically to cover the circumstances.
Key provisions dealt with by a Deed of Retirement:
- Exit of the outgoing partner – The date on which they will leave the partnership and confirmation of the terms of the continuing partnership
- Payments – The outgoing partner will be entitled to payment in respect of their share in the partnership. The settlement amount and the manner of payment may be determined by the provisions of any partnership agreement or as otherwise agreed between the partners
- Partnership Property – The formal transfer of all property belonging to the partnership from the outgoing partner. Where property is subject to a liability (such as a mortgage), the continuing partners will typically agree to procure release the outgoing partner from the liability
- Liabilities – An outgoing partner can be discharged from existing partnership liabilities by agreement with the other partners. Depending on the circumstances of the departure, the partners may give the outgoing partner an indemnity to cover their existing liabilities, up to the date of retirement. but usually subject to some exceptions, such as in respect of debts incurred as the result of any fraudulent or negligent acts of the outgoing partner or relating to personal tax
- Restrictions on Future Activities – Restrictive covenants may be imposed on the future activities of the outgoing partner. either in the Partnership Agreement or by the inclusion of specific provisions in the Deed of Retirement. The restrictions may include:
- time-based restrictions on dealing with customers of the business
- carrying on certain activities in competition with the partnership, or
- carrying on a competing business within a certain area.
However, the enforceability of these restrictions will normally depend on how reasonable they are for the protection of the goodwill of the ongoing business; and
- Post Retirement Matters – This can deal with matters which are specific to the sector of the partnership, such as notices to professional or other relevant bodies or more general matters such as notice to customers and suppliers that an outgoing partner is no longer a partner to protect the outgoing partner from ongoing liability. Consideration should be given to what is necessary in the circumstances.
Benefit of a Deed of Retirement
- Clarity – Whether or not the outgoing partner is leaving the partnership on good terms, implementing the exit through a Deed of Retirement will help provide clarity as to obligations and rights of all parties
- Confidentiality – A Deed of Retirement will typically include a clause obliging the parties to keep the terms of the Deed confidential (with some exceptions). Therefore, other than the outgoing partner’s physical exit from the partnership, the terms of the exit can be confidential from third parties
- Specificity – A Deed of Retirement can be made specific to the circumstances and business of the partnership
- Formality – once agreed and signed, the Deed of Retirement will be binding on the parties, meaning that in the event of non-compliance with the Deed, the party in breach can be sued for breach of the Deed.