Does the 1890 Act govern your farm partnership?

The legislation is being described as 'archaic'

Farm partnerships are like marriages and, as with every marriage, at times you are going to experience conflict. You should therefore ensure you are protected in the event of a dispute. File Picture.  

Farm partnerships have become a lot more commonplace. In the absence of a written agreement, farm partnerships are governed by the Partnership Act 1890.

The 1890 Act is an archaic piece of legislation, and is not specifically aimed at farm partnerships, rather at business partnerships in general. If a written partnership agreement is not thorough and comprehensive, then the 1890 Act will determine what happens, for example, in the event of a partner’s death.

If you do not put in place a legal document setting out exactly what you are agreeing to, and what happens when a dispute arises etc, the 1890 Act will dictate exactly what happens.

Farmers looking to enter into a partnership should talk to their agricultural consultant, accountant, and solicitor, about what they want from a partnership agreement. A collaborative effort is necessary.

In the absence of an agreement, the Partnership Act 1890 contains “default provisions”. Generally, the partnership agreement will be dissolved immediately upon the death or bankruptcy of one partner. 

You will then owe your partner’s estate a debt for their share, that accrues from the date of death. Because of the impact on your finances and on having to wind up the business, this outcome may not be what either of you had intended when you started your enterprise together.

This can create avoidable stress for yourself and for your partner’s estate, and can be very time-consuming, on top of substantial damage to the finances and goodwill of a business. For example, obtaining a grant of representation (probate) to the deceased partner’s estate can take some months.

In a partnership agreement, provision can be made for payments to a dependent of the deceased partner commencing shortly after death.

These are usually discretionary on the part of the surviving partners, and are set against the deceased’s partner’s share of the partnership’ but have the advantage of not requiring probate to be obtained first’ so that some provision for a dependent can be made at a much earlier stage than might otherwise be the case.

A farm partnership agreement should specifically refer to the shares, rights and responsibilities of each party to the agreement.

There will also be issues as to what happens on termination of the agreement or death of one or both of the parties. This should all be dealt with specifically, and there should be no grey area left because, in the event of a dispute, it will be more easily resolved once it is dealt with in black and white in the agreement.

Many farmers do not feel it is a necessary step to include stringent clauses leaving no room for ambiguity, as they a dealing with a ‘friend’.

However, partnerships are like marriages and, as with every marriage, at times you are going to experience conflict. You should ensure you are protected in the event of a dispute, for example, that you are not left solely responsible for any bank debt, etc.

Eaxh farm partnership agreement will be different and should be specifically tailored to the needs of the individuals involved. There will always be different nuances required in each situation, whether for tax reasons or just to suit the specific situation.

It is important you contact a solicitor with experience in this area.

If you choose a partner you know, trust, and who has a similar work ethic to you, and have a comprehensive written agreement in place that maps specific routes and exit strategies in the event of the relationship breaking down, then the road will be a lot smoother.

A simple handshake between family members or friends is not sufficient, when your finances and reputation are on the line in a business venture.