Agriculture is one of Northern Ireland’s most important industries. As a whole, the agri-food industry turns over more than £4.5 billion every year, and supports one in eight jobs in the UK (according to Ulster Farmers Union), making it a cornerstone of Northern Ireland’s economy. Farmers play a key role in this.

Currently, there are over 29,000 farmers in Northern Ireland producing the wide variety of raw materials needed by processors and retailers to meet the demands of consumers. Farming in Northern Ireland is not just a job but it is a way of life and those involved in farming are extremely proud of their family farming structure. Rural communities here are extremely close knit and farmers and farming families are at the heart of these communities.

When you compare Northern Ireland to the other UK regions, and in fact the rest of Europe, we are definitely a region that punches above its weight when it comes to farming.

The backbone of most farm businesses in Northern Ireland is the family farming in partnership. The traditional partnership is still the business structure of choice for farming here. Whether this is due to the farmers’ reluctance to reinvent the wheel and a preference to stick with what they know, or genuine justification that this is the best business structure for them is questionable. Our view is that most farming businesses in Northern Ireland are partnerships because they have evolved naturally from one generation to the next with new partners being added as the old generation decides to reduce its involvement or retire from farming.

Given that many farming businesses involve different generations of the same family, a written Partnership Agreement is vital to keep the working relationship on a business footing. Unfortunately, however there is often a reluctance on the part of the family to document the arrangements between them, and although tacitly agreed to by the partners, they can be very fluid. There are risks associated with adopting this approach, not least when it comes to the death or retirement of a partner and the effect this has on the partnership in the event of a partner’s death or retirement.

Putting a written partnership agreement in place should be a number one priority for those who have not already attended to this.  The cost of having a Partnership Agreement put in place now is likely to be much less than the cost in resolving a dispute between partners which could otherwise arise later. Where no written partnership agreement exists, the partnership will be governed by the terms of the Partnership Act 1890 (“the Partnership Act”) which provides for a partnership to dissolve and be wound up on a partner’s death or retirement. In practice, what normally occurs is that the partnership, rather than being wound up, continues. This leaves open the question of what happens to the outgoing partner’s share or interest in the partnership.

The recent case of Hopper v Hopper has confirmed the courts’ approach to this situation and the effect of section 42 of the Partnership Act. The Court of Appeal in that case confirmed that, although dissolution of a partnership is deemed to occur on death or retirement, this does not extinguish the rights of the outgoing partner or his estate to a share in the profits of the partnership following dissolution. In that case, the court held that, as the accounts of the partnership prior to dissolution had shown, the deceased partner was entitled to 25% of the profits of the partnership (although these were not drawn by him and were credited to his capital account) and he continued under section 42 of the Partnership Act to be entitled to a 25% profit share for the use of his partnership assets.

Given this and other cases, if it is not the intention of the partners for a deceased or retiring partner to continue to receive his profit share following death, or indeed if the partners intend that a partner’s share in the partnership should be acquired by the continuing partners, it is essential for a partnership agreement to be put in place detailing these intentions.

The terms of a written Partnership Agreement need to be well-thought through and clearly written, especially in relation to any exit strategy for one or more of the partners.

What should a Partnership Agreement contain?

1. Who are parties to the Agreement? Decisions about who should be included as partners in the farm business require careful discussion with an accountant about income tax consequences, roles of those involved and how the assets are to be held.
2. Business of the partnership? Farming businesses are no longer confined to agricultural enterprise, they will often have some element of diversification or other business interest involved. Careful consideration needs to be given as to what the business of the partnership should be and how this may develop going forward and whether there is a need at some point to divide the current partnership to reflect this.
3. What land, buildings and housing will be required? Who will own those premises? Clarity to ownership is key. It is essential for those involved to know whether assets used by a farming partnership are personal property of a partner or property belonging to the partnership.
4. Term. It is rare to see farming partnership agreements made for a specific term.
5. How much capital will be required initially and in what proportions will the partners themselves provide capital?
6. Will profits and losses be apportioned in the same proportions as capital share?
7. What future funding will be required?
8. On what basis are profits/losses to be calculated for the purpose of allocating them to partners?
9. How much will partners be entitled to draw on account of profits?
10. Who is the partners’ team of advisers and professionals? The partnership agreement should document the accountants and bank used by the partnership.
11. How much time will partners devote to the partnership business?
12. Retirement of a partner is one of those areas which a partnership agreement must deal with.
13. Dissolution. The circumstances upon which this can take place needs to be discussed at the outset.
14. A dispute resolution clause should be included within the agreement. Despite the best efforts of those concerned, there will inevitably be situations whereby people disagree about the future of a farming business, people’s roles within that business and its day to day running.

Having the terms of a partnership expressly stated in a Partnership Agreement, particularly regarding what happens on the death or retirement of a partner, goes hand in hand with the preparation of Wills for each of the partners and Inheritance Tax Planning. It is essential that these matters complement one another. For that reason, it is highly advisable to use the services of a solicitor, rather than attempting to draft a Will or partnership agreement yourself. A solicitor who has expertise in this field can advise you properly as well as being able to use their drafting skills in preparing the Partnership Agreement and Wills.

 

Much of the above applies to most partnerships, whether farming or other family run businesses. If you are farming or running any family business in partnership without a written Partnership Agreement in place, you should make it a priority to seek the advice and services of a solicitor to have a Partnership Agreement and Wills put in place as soon as possible. Failing to do so could have disastrous consequences. After all, you only reap what you sow!

If you need advice in relation to farming or other business partnerships, please contact our experienced team of solicitors specialising in agricultural law headed by Alan Reid including Millicent Tate, Sarah Shannon and John O’Prey.