Key document focus – Deeds of Retirement and Deeds of Adherence

30th November 2013

Whether you have a partner leaving your medical practice, or a new partner joining the practice, it is important that such a transition is catered for legally. Furthermore, it is of vital importance that these documents not only reflect the existing partnership agreement in place, but also deal with important provisions relating to partnership property, liabilities (both past and future) and distribution of assets and profits.

Deed of Retirement

A Deed of Retirement is used in respect of an outgoing partner. Whilst called a Deed of Retirement, it can often be used to deal with outgoing partners that have either been expelled or have died. Owing to the formalities that need to be taken care of in respect of an outgoing partner, such documents are often complex.

The document will deal with several key areas:

• Retirement of the outgoing partner – the date on which the partner will retire (with reference to the relevant partnership agreement clause, if applicable) and whether the existing partnership will continue and if so, on what terms;

• Partnership property – the formal transfer of all property belonging to the partnership from the individual partner to the remaining partners. Where such property is held subject to a liability (such as a mortgage), the continuing partners will typically endeavour to release the outgoing partner from such debt;

• Liabilities – the continuing partners will typically indemnify an outgoing partner from any liabilities the partnership incurs. Whilst the outgoing partner cannot be released from debts incurred before they leave the partnership, the remaining partners can agree to indemnify any costs incurred by the outgoing partner in payment of those debts;

• Payments – the retirement of a partner will mean that cessation accounts will need to be drawn up to value the outgoing partners share. Such share will then typically be owed to the outgoing partner, along with any other amounts agreed under the partnership agreement or as a result of negotiation between the parties;

• Restrictions – there may be restrictive covenants imposed on an outgoing partner. The extent to which these are reasonable will depend on how enforceable they are (see this edition’s Q&A for more information on restrictive covenants); and

• Notices – In order to discharge future liabilities from the outgoing partner, a notice will usually be placed in the London Gazette to announce that as of an effective date, a partner has left the practice. Similarly, there may need to be notice given to the NHS in respect of any GMS contracts held. See our article on GMS contracts in this issue for further information.

It is vitally important that all of the above areas are dealt with. Failing to deal with just one element of the retirement of a partner from your practice could be disastrous for the continuing business, outgoing partner or other stakeholders in your practice.

Deed of Adherence

A Deed of Adherence is used in respect of an incoming partner. Often enough, these will be fairly simple documents to state that the incoming partner agrees to be bound by the terms of the existing partnership agreement.

There will also be important provisions relating to:

• Capital – If the partner is bringing in capital to the partnership, such a clause will set out the amount being brought into the practice and how such capital will be paid, including the timescale for an injection of such.

• Profits and losses – with the new partner entering into the partnership, the profit and loss shares will need to be adjusted according to the partners’ wishes. Such a clause will vary the existing agreement.

Whatever the distribution of profits and injection of capital that the new partner will join the partnership with, it is important to ensure that the incoming partner is effectively bound by the existing partnership agreement. Having a properly drafted Deed of Adheren is therefore vital in achieving this.

An alternative to Deeds – new partnership agreement

Of course, Deeds of Retirement and Adherence are not the only way of removing and adding new partners to the practice. It could be that a technical dissolution of the partnership takes place on the retirement/admission of a new partner, with a new partnership agreement being implemented on the change. A technical dissolution means the end of the original partnership and the start of a new one. This type of dissolution does not therefore result in a winding up of the business.

In such circumstances, the partnership accounts are drawn up to reflect the situation on the last day before the new agreement is entered into. The partner would then join/ leave the practice and the new partnership agreement will be entered into.

This is often a good opportunity to refresh the partnership agreement of your practice and certainly, if your partnership agreement has not been updated in a number of years, there is good reason to do so on a change of partner.