Jonathan Waters, partner and commercial law specialist at Hay & Kilner looks at the value of partnership agreements.
The recently decided case of ‘Ham v Ham and another’ is a sorry tale involving a harsh lesson which those involved in farming partnerships would do well to heed.
Background to the case
Mr and Mrs Ham started their farming business in the mid-sixties. By 1997, the business had grown considerably, and Mr and Mrs Ham took their son John, who was then 19, into the family partnership.
The three family members entered into a written Partnership Agreement which required any partner to give the others three months’ written notice if the partnership was to be terminated. The remaining partners would then be entitled to buy out the leaving partner at the ‘net value’ of his or her share.
There was a falling out, and in 2009 son John served notice on his parents that he wished to leave. Litigation followed to determine how John’s share of the partnership should be calculated. Initially, it was decided that John’s share would be calculated on the same basis as the annual accounts were drawn up. This was the ‘book value’ of the farm, rather than an up-to-date full market value of all the partnership assets. John was not happy with this outcome and appealed against the decision.
The Partnership Agreement
This stated that the net value of the outgoing partner’s share should be agreed between the partners. If no agreement could be reached, the value would be decided by the accountants who acted for the partnership. John’s appeal was allowed on the basis that there was no presumption or any default rules indicating how the shares should be valued. The Partnership Agreement needed to be interpreted, and the fact that this was a family farming partnership had to be taken into account. The court therefore considered that the partnership was likely to be asset-rich and cash-poor.
Unfortunately, the advisor who had drafted the Partnership Agreement did not make a distinction between assets and capital, and did not take into account that their client was a family working together and that different dynamics might therefore be in operation. The accounts prepared during the partnership did not indicate how the assets should be shared on termination of the partnership. If the partnership was to be wound up, the assets would have to be sold and the proceeds distributed between the partners. It would therefore be strange if the same method was not applied when a partner left the partnership.
As the relevant clause in the Partnership Agreement did not state that the outgoing partner was entitled to his capital and profit, but rather the ‘net value’ of his share, the court decided that John was entitled to his share of the partnership property. His parents would therefore have no other option but to sell the business to pay their son’s share.
The moral of the story
If the family had taken the advice of a solicitor proficient in advising family partnership businesses, then the matter may not have gone to court and a solution could have been found to ensure the family ties were not broken irreparably. A well thought out and clearly worded Partnership Agreement, developed alongside a succession plan for the business, could well have avoided the dispute and the resulting need to dispose of the farm.
For further information or advice, please contact Jonathan Waters on 0191 232 8345 or email: firstname.lastname@example.org