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Farming agreements need to be more than just fairy tales

 

Article date:  27/04/2015

A specialist in business structures and partnership matters believes that the 'cowshed Cinderella' case which hit the headlines earlier this year illustrates just how fraught the issue of succession in farming businesses can be - in part because it relies on a piece of Victorian legislation.

The case saw Eirian Davies, who had worked on her parents' farm for little or no money throughout her life on the promise of inheriting the business, awarded £1.3m by the courts after her parents changed their will to her disadvantage.

"Not all succession cases are as complex and involve such large amounts of compensation as that of the Davies'," explains Geoff Kettle, an associate at Midlands based solicitors, Higgs & Sons. "But when it comes to farming partnerships, without a signed partnership agreement, those involved may be relying on a piece of legislation that is over 125 years old.

"The 1890 Partnership Act will apply to anyone who does not have a signed partnership agreement in place.

"It's hard to believe that a piece of legislation that was enacted so long ago is still live. And although one of the reasons it has survived  is its simplicity, farming businesses have changed immeasurably since the late 1800s so it is unlikely that the Act will be able to help when it comes to managing changes in a modern farming partnership business."

Geoff, who advises the firm's Rural Services group on issues ranging from restructuring and corporate governance to partnership and limited liability partnership matters, believes there are several instances where the Act falls short when it comes to 21st Century requirements.

"The 1890 Act states that any partner may terminate the partnership on giving notice to the others at any time.  This might sound straight forward when it comes to retirement for example, or when one 'partner' has simply had enough and is seeking to leave without restriction. Problems arise as the Act goes on to say that as a result of terminating the partnership, it is then dissolved and wound up. 

"In reality this means that all of the assets must be realised (sold) and all of the creditors paid off. Yes the remaining partners can agree not to wind up the partnership, but issues around valuing the departing partner's share and how and when they should be paid out can be complex and long winded. When it comes to applying the law, the simplest way is not always the easiest unfortunately.

"Many succession issues can be addressed in a partnership agreement that states what must happen and by when," concludes Geoff Kettle. "Everyone will then have the time to plan their actions, raise any appropriate funds, and concentrate on running the business.

"Without such an agreement then those relying on the 1890 Act who believe they have a farming partnership in place, may well just have a wolf in sheep's clothing."

If you would like to know more, please contact Geoff Kettle at Higgs & Sons on 01384 327125. For guidance on all rural matters, contact rural@higgsandsons.co.uk or call 0845 1115050.

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