Farming succession planning & property: How to avoid disputes
25th June 2019
Mark Shelton See profile
For many family farming enterprises, making the next generation partners in the business is the key to effective succession planning. It can provide the younger generation with more management responsibility and a potential transfer of assets as the older generation’s role in the business reduces.
However, if the partnership includes property – either introduced by the partners or purchased by the partnership – it’s important that all involved agree how the property is to be treated on the death or retirement of a partner.
The value of property held by a farming partnership is often substantial and frequently far in excess of book value. The presumption of trust that exists within a family business sometimes means that important issues are not always detailed in writing, which can then lead to misunderstandings. Differences between ownership and occupation of property can also make matters unclear.
So it’s no surprise that disputes can arise regarding partnership properties on a farm. There may be no problem while the partnership continues to trade and the partners all get on, but a clear understanding of the partners’ interests in any property is essential in the event of death, dissolution or divorce.
A couple of recent legal cases (Ham v Bell  and Wild v Wild  ) underline the need to ensure that partners’ intentions regarding property are clearly documented in a partnership agreement, and that the partners’ interests in the property are correctly reflected in the accounts. Both cases related to ambiguity regarding the correct treatment of property in the partnership agreement and the accounts. Both resulted in costly and acrimonious disputes between family members, and both could, but for the court’s decisions, have resulted in an unintended distribution of wealth.
The default position as set out in the Partnership Act 1890 is that, in the absence of any other agreement between the partners, all partners share equally in the profits of the business, and capital profits such as increases in the value of property are shared in the same proportions as revenue profits.
For example, in a partnership involving a mother, father and son, the son would potentially be entitled to one third of the increase in the value of any property. The property may have been introduced into the business by his parents many years before he became a partner. They may have taken the view that the property was theirs, and that their son had no interest in it. It may have been intended as their pension, or they may have expected the value of the property to be shared between all of their children.
The important distinction to make here is between revenue and capital; what are the partners’ interests in the capital of the partnership (whether representing property or other assets) as distinct from accumulated profits in the business, and how are the capital profits to be shared as distinct from the normal trading profits? These should all be clearly set out in the partnership agreement, and the annual partnership accounts should reflect each partner’s interest.
To avoid the sort of disputes seen in the Ham and Wild cases, and to ensure a smooth succession of the business to the younger generation, the partners and their advisors need to do the following:
- Discuss and agree the partners’ intentions with regard to property held by them or the partnership
- Ensure that the partners’ intentions are correctly reflected in the partnership agreement which should be clear, unambiguous and up to date
- Record any changes relating to property (such as additions and improvements), either in an updated agreement, in a memorandum or in minutes
- Ensure that the annual accounts correctly reflect the intentions of the partners and that any significant matters are discussed and agreed with all partners before signing
- Solicitors and accountants should liaise to ensure consistency between the legal and accounting treatment of property.
Mark Shelton is a forensic accountant specialising in agricultural disputes. He has dealt with the accounting aspects of a number of farm partnership disputes, most of which related to a partner’s entitlement to share in the value of a property.