Given that many farming businesses involve different generations of the same family, an Agricultural Partnership Agreement is vital to keep the working relationship on a business footing.
However, it needs to be well-thought through and clearly written, especially in relation to any exit strategy for one or more of the partners.
Alistair Millar, agricultural lawyer at Tallents in Southwell, looks at the key issues regarding Agricultural Partnership Agreements that farming families should consider.
Every Agricultural Partnership Agreement should contain clearly-written provisions for the exit of any partner at any time. This will usually identify how assets will be valued and divided in the event of a partner leaving.
However, as farming businesses are often asset rich but cash poor, it’s important to get early clarity on what will happen both to the partnership when the exit provision is triggered and how the valuation of assets will be reached, long before the Agricultural Partnership Agreement is drafted and signed.
A recent case Ham v Ham & another highlighted a lack of clarity in the Agricultural Partnership Agreement over how the partnership assets would be valued when one partner wanted to exit.
In this particular case, the son wished to leave the farming partnership he had entered into nine years earlier with his parents. The Agricultural Partnership Agreement stated that the remaining partners would buy out the leaving partner after three months notice of the intention to quit. However, the dispute arose over the valuation of the farm assets at the buyout point.
The son felt he was entitled to a share of the full market value of the farm, but the parents argued that their son’s share should be based on the book value of the assets – which was significantly less.
The initial court hearing agreed with the parents and determined that the son’s share of the assets would be based on the annual accounts rather than on an up-to-date valuation of the partnership assets. The son appealed this decision and the Appeals Court overruled the initial decision and instead concluded that the son was entitled to make a market value claim on the assets.
As a result it was likely that the farming business would have to be sold to allow the parents to pay the son his due share of the business.
This case highlights the need for a Partnership Agreement to clearly cover the basis of valuation of assets in any exit provisions. For the Hams and their son, this dispute dragged on for several years causing heartache, stress and incredible expense for both parties.
Sadly, it is very likely that we will see similar cases brought to the courts in the future as few farming families see the need for clearly-written and robust Agricultural Partnership Agreements before it is too late.
It’s vital that time is taken to get these agreements correctly written in the first place, rather than running the risk of dispute and incurring significant financial consequences in the future.
Tallents have been working closely with farming families in Nottinghamshire and Lincolnshire since 1774 and have extensive experience in drafting robust Agricultural Partnership Agreements specific to the farming industry. Our experts are here to help farming businesses get appropriate Agricultural Partnership Agreements in place.