What happens to our Farming Partnership Agreement on separation or divorce?

At Silk Family Law – particularly our North Yorkshire office – we deal with a lot of divorce cases involving farming partnerships. Land and property are often tied up within the business structure, and may also involve intergenerational family assets or trusts. The complexity of these cases requires specialist knowledge and expertise, particularly when undertaking divorce financial proceedings.

When marriages or relationships breakdown in cases involving a farming partnership, it is not only the practical and emotional issues that need to be addressed. Often, farming businesses are operated within a partnership structure and in many cases mothers, fathers, sons, daughters, husbands and wives are all interlinked within the partnership arrangement.

In this blog post, I will cover some of the main things to consider upon divorce where a farming partnership is involved.

Farming partnerships: What happens on divorce if we don’t have a ‘Partnership Agreement’?

The starting point in dealing with any partnership issues arising following the breakdown of a marriage or a cohabiting relationship is to consider the detailed terms of the Partnership Agreement.  If there is no Partnership Agreement in place, the business’s arrangement is deemed to be a partnership at will and will be governed by statute.           

It is usually advisable for a formal Partnership Agreement to be entered into by the family members, particularly when introducing new partners to the business. This is the case whether family members or spouses of family members – in order to avoid or at least lessen the significant difficulties that may arise if the marriage or cohabiting relationship turns sour.

With a partnership at will, there is always a risk that this could be dissolved unilaterally by one of the partners giving notice to the other.  There are often far reaching implications in the event that this should happen – including the effect on profit share and general income provision.

We have a Partnership Agreement – what happens on divorce or separation?

If there is a Partnership Agreement, there may be grounds to expel one partner from the business if this becomes necessary. This must be balanced against the need to consider other family members’ interests in the business and it may be that the partners are themselves in conflict and will require their own independent advice.

In the event of divorce or separation it is important that interim arrangements are agreed and put in place as early as possible.  An agreement should be reached regarding drawings from the partnership. Are the parties intending to continue to withdraw from the partnership bank account on an ad hoc or needs basis as previously? Are changes required to formalise the use of funds? Is spousal maintenance to be paid from the partnership at a fixed rate?  If so, how is this to be determined? Is one of the parties to the marriage going to leave the family home and do costs of alternative accommodation need to be met?

Partnership Agreement on divorce – things to consider

Consideration needs to be given as to who is going to run the farming business on a day to day basis in circumstances where the relationship between the two married partners may have broken down completely. If both are no longer going to be involved in the day-to-day work, are they going to continue to receive information and be involved in the decision making of the partnership until such time as the financial claims of the married or cohabiting partners are resolved.

Consideration needs to be given to the use of the business bank account. Does the bank need to be notified?  Is there a risk that the farming bankers will become nervous and freeze the account? Should both parties have free and unrestricted access to the partnership funds through the bank accounts? 

Is there a risk that fixed assets of the business will be removed or sold? How is the business intended to continue in terms of loans, overdraft facilities, purchase and sale of goods, machinery etc pending a resolution of all claims?

Seeking the assistance and advice of the business accountant is usually a good, first port of call. Provided both parties have trust in the business accountant to ensure that matters are dealt with in an even handed way, the accountant is often a good intervener to smooth the way when dealing with these interim arrangements at what is inevitably a very difficult time for all concerned. Often the impact extends beyond the separating couple, particularly when other family members are directly involved in the business.

In due course the business and the assets of the business (land, stock, growing crops, machinery etc) will need to be valued.  A valuer who is familiar with the land and who may have carried out valuation reports in the past – either for CGT or bank borrowing purposes – may be instructed. Whilst there can be some benefits in instructing a valuer who is familiar with the business, particularly in terms of costs, it is vital that the valuation is without bias.

These are often difficult issues to resolve and expert advice is required. 

If you would like to discuss any of the issues in this blog you can contact Harriet Reid on 07809 340 314 or harriet.reid@silkfamilylaw.co.uk. Harriet is an experienced family lawyer with particular expertise in complex and substantial finance cases, particularly those involving family businesses and farms.