12th March 2019
Business Partnerships – Breaking Up Is Hard To Do
Our client was a sheep farmer. She originally had her own farm in the North of England, but after she met and married Mr D – also a farmer – they joined their separate businesses together and bought a farm near Monmouth. After a few years, the client was running the farm on her own, and Mr D was no longer doing farm work and had started working for a haulage firm.
Unfortunately the marriage broke down and one day Mr D suddenly moved out. While still recovering from this bombshell, the next thing the client knew was that she had received a letter demanding a very large sum of money. It was from her husband’s solicitors, who said that he was a 50% partner in the farm business, and was entitled to half the sheep, half the vehicles, half the profits – essentially he wanted half the farm.
When the client first came to see us, we asked to see the partnership agreement. This is a document that sets out the rights and responsibilities of partners in a business, who owns what share, and what should happen if the partnership comes to an end. The client said that she and her husband had never had such a document. In that case, we told her, the default position applies, which is generally that a departing partner can demand that the partnership assets are sold, the debts are paid, and what’s left is distributed equally to the partners.
Selling the farm assets and business would have been a disaster for the client. She had spent her working life building up her flock. While her husband had been a partner in name, she was the one who had done the early mornings and late nights, had been out in all weathers, and had expanded and grown the business. It would be very unfair for all that hard work to come to nothing. But the client’s problem was that she did not have the funds to pay 50% of the value of the business to her husband.
There was no way of resisting Mr D’s claim: because there was no agreement, the default position was that he could indeed demand the sale of the business assets or a 50% share. A partnership agreement could have set out the shares each of them had in the business.
However we set out to negotiate a settlement of the claim. After discussions with his solicitors, we found out that he had no need of the payment as a lump sum, and would be willing to receive it over a number of years. The client realised that she could raise sum funds by selling some of her sheep and some of the farm’s vehicles and equipment, and so could make the first two years’ payments from that. Her accountant advised her that on current trends she should be able to make enough profit to pay Mr D the remaining payments in the years after that.
The result was that our client kept the farm and is thriving. She is minus a husband, but after a few years will be the sole owner of the farm business.
This case underlines the importance of a partnership agreement which sets out ownership shares, and the process for a partner leaving the partnership.