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Unravelling farming partnerships: has your farm inadvertently become a shared partnership asset?

15 Oct 2024 | 5 minute read

Our Farms, Estates and Rural Land team frequently advise clients who are going through contested partnership dissolutions. One of the key issues in dispute is often whether the farm is a partnership asset and, if so, whether it is now owned (intentionally or otherwise) by all of the partners. In this article, Danielle Spalding and Arron Jolliffe discuss the key risks to be aware of if you are farming your land in partnership with others.

The classic scenario

Sadly, all too often we are instructed on matters which bear the following key features:

An older couple own a farm which they have farmed in partnership for many years. They do not have a written partnership agreement and the farm (or part of it) is included as an asset in the partnership accounts.
As part of their succession planning, the older couple decide to bring new partners into the partnership. Very commonly, these new partners are the older couple's child and their spouse. They do not complete a written partnership agreement or seek/receive legal and/or accounting advice about how the farm is held and how that should be reflected in the partnership accounts.
After a while, the relationship between the partners deteriorates - for example, because of a breakdown in the younger couple's marriage - and the partners decide to wind up the partnership.
One or more of the new partners then claim that they own an equal share in the farm, on the basis that it is a partnership asset which should be divided equally between all of the partners.

The legal issues

In England and Wales, partnership law is governed primarily by the Partnership Act 1890 (the PA 1890). The PA 1890 allows partners to enter into a written partnership agreement which will govern how the partnership operates (including, for example, how assets are owned, how profits are to be divided and what process needs to be followed to dissolve the partnership). In the absence of a written partnership agreement, the partnership will generally operate in accordance with the default rules set out in the PA 1890, unless varied by the partners' implicit agreement.

Crucially, under the PA 1890, the default rule is that partners "are entitled to share equally in the capital… of the business". Therefore, if property owned by one partner becomes a partnership asset - and therefore "capital of the business" - then the default rule is that each of the partners automatically acquires an equal share in that property.

In many of the partnership dissolution matters we are instructed on, a key issue is whether the farm has become a partnership asset and is therefore owned equally by all of the partners. This is unsurprising as it is invariably the most valuable asset in the business. In the absence of a written partnership agreement (which we would expect to explicitly state what land, if any, is a partnership asset) the key question is: have the partners treated the farm as if it has been brought into the partnership to be used for the purposes of the partnership business?

The evidence on this issue can often be unclear, incomplete and/or contradictory, particularly if the partners have never given detailed thought to this issue and the accounts do not clearly set out how the land has been dealt with. This can ultimately have devastating unintended consequences, as - going back to our classic scenario - the landowning older couple can find that their farm (where they live and which has been in their family for generations) is now owned in equal shares by them, their child, and their child's ex-spouse. This may mean that they cannot leave the farm as they had intended in their wills; instead, they will only be able to leave their 'partnership share' in the farm to their intended successors. In addition, they may find themselves faced with an unexpected capital gains tax bill arising from the unintended 'gifts' to the other partners.

Evidence that may be relevant to whether the farm has become a partnership asset can include the following:

Whether the farm is included in the partnership accounts. If so, this would indicate that all of the partners intended the land to be a partnership asset.
Whether the landowning partner has granted a written tenancy or licence to the partnership. Even if the farm has been included in the accounts, if the landowning partner entered into a written tenancy or licence agreement with the partnership, this might indicate that the parties in fact intended the partnership to only occupy the farm pursuant to this more limited right of occupation, rather than on the basis that the farm has become a partnership asset.
Whether the annual accounts include a detailed breakdown of each partner's capital account. If the farm has been included in the annual accounts, it can be extremely helpful if the accounts include a breakdown of each partner's capital, as this can indicate that, whilst the farm has become a partnership asset, the capital value has been retained by the landowning partner, and the parties have therefore implicitly agreed that the capital in this asset is not to be shared equally between the partners. It is even clearer if the land is shown in a separate land capital account that designates which partners own a share in the land.
What the partners actually thought they were signing up to. Did the partners actively consider how the farm should be held? Did they seek or receive legal or accounting advice about whether the farm should become a partnership asset and how it should be recorded in the partnership accounts? Given that the landowning partner is likely to say that he/she had no intention of the farm becoming a partnership asset and the claiming partner is likely to say the opposite, this question can often come down to whose evidence a court finds more convincing when the partners take to the witness box.

What steps can landowning partners take to reduce the risk of the farm inadvertently becoming a shared partnership asset?

Fortunately, there are several simple steps that a landowning partner can take to reduce the risk of the farm inadvertently becoming a shared partnership asset:

If you are thinking about introducing new partners to an existing partnership or forming a new partnership which would farm your land, take suitable legal and accounting advice on how the land should be dealt with in the partnership. Be conscious of the fact that you may be advised that it is more tax efficient for the farm to be included as a partnership asset, but that does not automatically mean that it is the right thing for you: consider whether the partnership is set up to protect you and ensure you retain this asset when the partnership comes to an end.

If you are introducing new partners to your farming business, be open, honest and clear about how the farm is going to be held. If your intention is that the farm will remain owned entirely by you, say so, and ensure that the incoming partners accept and agree to that.

The clearest way to protect your position is to enter into a written partnership agreement which clearly states whether or not the farm is to become a partnership asset and, if it is, whether the capital value of that asset will be retained by the landowning partners or shared equally between all of the partners.

We would also strongly recommend that you ensure that the annual accounts include a clear and detailed capital account for each partner which reflects how you intend the land to be held – so, for example, if you intend the farm to be a partnership asset but for the capital in it to be retained entirely by you, the value of that asset should be attributed entirely to your capital account (or better still, shown on a separate land capital account).

Our Farms, Estates and Rural Land team frequently advise clients looking to form, review or dissolve farming partnerships. If you need any advice from our specialist farming lawyers, please do not hesitate to get in touch.