Why your farming business needs a partnership agreement

Many farming and family businesses are built on trust, hard work and the expectation that things will continue as they always have. Families may work together for years, sometimes across generations, without formally recording who owns what, how profits are shared or what should happen if someone dies, retires or wants to leave.

That informality can work well for a time. But when circumstances change, the absence of a clear written agreement can quickly lead to uncertainty, tension and expensive disputes. In many cases, those disputes could have been avoided, or resolved far more quickly, with a properly drafted partnership agreement.

This article explains why any farming business run by two or more people should have a well-drafted partnership agreement and the risks of operating without one.

The risks of operating without a partnership agreement

When business relationships break down, legal rights often become decisive. Without a written partnership agreement, those rights are determined by default statutory rules and general law. These defaults are rarely tailored to the parties’ commercial reality or family circumstances.

The risk is particularly acute in farming families, where informal arrangements may continue for decades before a death, retirement or dispute exposes the uncertainty.

What happens if there is no written partnership agreement?

A partnership arises when two or more people carry on business together with a view to profit. No formality is required. As a result, many partnerships exist without the parties fully appreciating it. If there is no written partnership agreement, the Partnership Act 1890 applies by default.

This is common in farming families. Where relatives work a farm together for profit, the law may treat them as partners even if no formal partnership was intended. Each time someone leaves, retires or dies, that partnership may come to an end and a new one may arise between those who continue the business. Over time, the same farm may therefore have been run through several different partnerships, often without anyone realising it.

The Partnership Act 1890 is a Victorian statute and is often a poor fit for modern businesses, including farming partnerships. For example:

• Equal profit sharing: all partners share equally in the profits and losses of the partnership, regardless of their respective contributions of capital, time or expertise
• No power of expulsion: no partner can be expelled from the partnership, however serious their misconduct, unless there is an express agreement allowing for it
• Unlimited personal liability: partners have joint and several personal liability for all debts and obligations of the partnership, with no limit

A written partnership agreement allows the parties to replace these defaults with terms tailored to their business. It can deal with profit shares, capital contributions, decision-making, voting rights, the admission and retirement of partners, expulsion, restrictive covenants, dispute resolution, dissolution and exit arrangements.

For farming partnerships, clarity over land is especially important. Land is often the most valuable asset and the most likely source of dispute. A written agreement should specify which assets belong to the partnership and whether farmland is held as a partnership asset or occupied under a licence or tenancy. Without that clarity, uncertainty can quickly turn into dispute, particularly where children have been promised land but the wills and partnership arrangements do not reflect the same intention.

This is also an important part of an overall succession plan for the business. However, be aware that provisions about the treatment of property in a partnership agreement are likely to override what may be provided for in a will. Itis critical that the will and the partnership agreement dovetail to avoid issues at a later stage.

How a partnership agreement protects your farming business

A partnership agreement is not simply a document for when things go wrong. It is a foundation document for the business. It requires co-owners to address important questions at the outset: How are decisions made? What happens if someone leaves? How is the business valued? What if there is a deadlock?

These questions will need to be answered eventually. It is far better to answer them calmly and deliberately than during a dispute.

A clear agreement can also provide reassurance to lenders and investors, who will want to understand how the business is owned and governed before committing their support.

From a farming perspective, the two critical points that a partnership agreement should provide for are the ownership of assets (livestock, deadstock and land) and what happens when a partner dies or wants to leave. For example, if a partner dies and thereis no written partnership agreement, that technically triggers an immediate dissolution and the bank is likely to freeze the partnership account. This could spell disaster when thereis livestock to feed or seeds or fertiliser to purchase. However, this can be easily addressed in a partnership agreement, which can provide that the business will continue in those circumstances.

When should you act?

The best time to put an agreement in place is at the start of the relationship. However, if the business is already trading without one, it is not too late. Long-standing informal arrangements can often be reviewed and formalised before a problem arises.

Existing agreements should also be reviewed periodically. They may no longer reflect the business, the law or the family’s succession plans. For farming families in particular, partnership agreements, wills and succession arrangements should be considered together so that they are consistent and reflect the intended position.

Our specialist agricultural and commercial teams advise farming families and business owners on succession planning, partnership and shareholder issues, including disputes arising from unclear ownership and business governance. Often, issues relating to the partnership form part of a wider dispute about the future of the farm and the ownership of assets, including claims based on proprietary estoppel.

We understand the issues that can arise when clear agreements are missing and help clients put in place and review partnership agreements and wills with a view to reducing the risk of future disputes.

Agriculture is undoubtedly facing difficult times at the moment. Incomes are suffering, placing strain on farming businesses and family relations. Prevention is always better than cure; thereis an opportunity for businesses to get their affairs in order and make sure their succession and tax mitigation plans are in place.

Where issues do arise, taking advice early can make the difference between a manageable issue and a damaging dispute, whether you are starting a business, reviewing existing arrangements or responding to concerns as they arise.