Is the land a partnership asset? The all-too common question explored
In an ideal world, all business owners operating as a partnership will have a signed written agreement recording whether any land used by the partnership is intended to belong to the partnership or whether it will belong to one or more of the partners personally.
Without clear documentation, it can be difficult to ascertain how the land is held as in both scenarios the partnership is likely to be permitted to use the land.
Many farming partnerships do not have a written partnership agreement or where there is one, it might be silent as to the partners’ intentions as to the ownership of the land.
This distinction may not seem important when the partnership is functioning well and all partners are co-operating, but upon dissolution and/or death of one or more of the partners, this distinction becomes critically important in order to determine whether the land:
- can be dealt with by the individual partner as their own land i.e. such as by gifting the land under their Will; or
- forms part of the overall partnership ‘pot’ of assets from which each partner is entitled to a share only. In this scenario, one partner cannot deal with the land as if it were their own (even if title to the land is held in their name) and instead they are only entitled to the value of a share of the land in question.
The Starting Point – The Partnership Act 1890
Despite being in its 134th year, the Partnership Act 1890 (“the Act”) governs the operation of traditional partnerships in the absence of any express agreement.
Section 20 of The Act describes partnership property as:
‘All property and rights and interests in property originally brought into the partnership stock or acquired, whether by purchase or otherwise, on account of the firm, or for the purposes and in the course of the partnership business…’.
The Act also provides that ‘Unless the contrary intention appears’, property bought with partnership money is deemed to have been bought on account of the partnership i.e. it would not belong to any particular partner.
The Court’s Approach
As the Act does not set out how to decide if the land is partnership property or not, the issue has been left to the courts to determine.
In the case of Williams v Williams & Ors [2022] EWHC 1717 (Ch), one of the questions before the Court was whether two farms (let’s call them ‘Farm 1’ and ‘Farm 2’) were assets of the partnership. In the absence of an express agreement that the farms would become partnership property, the judge confirmed that whether an asset is partnership property depends upon the intention of the partners and this will be a question of fact in each case.
The judge considered and balanced the evidence which indicated that the farms were intended to be partnership property (such as their historic treatment in the partnership accounts) against the evidence which pointed towards the farms being owned outside of the partnership.
The judge concluded that neither farm was intended to be partnership property:
- Farm 1: the most persuasive evidence was that a significant portion of the purchase price had been provided by just two of the partners with contributions from three of their children, it had been conveyed to the same two partners as beneficial joint tenants and the Claimant (who was also a partner) was not aware it was partnership property. Hence, the court held that Farm 1 was owned by the two partners personally and so the other partner (the Claimant) was not entitled to a share of that property;
- Farm 2: whilst the mortgage on Farm 2 was repaid by the partnership, the judge noted that half of the mortgage advance was paid by two of the partners. Furthermore, the Wills of the same partners (which were dated some two years after the purchase of Farm 2), provided that in the event that one did not survive the other by 28 days, their respective shares in the partnership would go to one of their sons, but their respective shares in Farm 2 would pass to the claimant. This showed that these two partners believed they were free to deal with Farm 2 as they wished i.e. it was not a partnership asset.
“But what if the farm is on the balance sheet?”
As noted in the judgment of Williams, the inclusion of an asset (such as land) in the partnership accounts is indicative of an intention that such an asset should be treated as partnership property, but it is not conclusive.
The following observations of the editors of the Encyclopaedia of Forms and Precedents have been referenced by the judiciary in various judgments on the question of intention:
“Practitioners should be wary of relying on the accounts as evidence of the intention of the parties, however, as often such an inclusion is made at the behest of the partnership accountants who include the item solely in order to get tax relief and without addressing the consequent ownership issues, let alone advising the partners to seek legal advice on them. Experience indicates that this is a particular problem with agricultural partnerships.”
Four key points to take away
- Whether or not land, or indeed any asset, is partnership property depends upon the partners’ intentions;
- In the absence of express agreement, the partners’ intentions are a question of fact to balanced up in each case on the available evidence;
- Partnership accounts are not definitive in determining whether land is partnership property; and
- The best way to avoid any disputes (which in a worst-case scenario can result in a sale of some or all of the farm to pay legal and other costs) is to document the partners’ intentions in a partnership agreement. This agreement should be reviewed and/or updated regularly especially when the partners are contemplating the introduction and/or purchase of further land or assets or new partners are joining the business.
Speak to a specialist
Clarke Willmott has extensive experience in advising family farming partnerships and if you would like advice on any issues raised in this article please contact Robert Mullen or Esther Woolford
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