The risks of not having a written partnership agreement and the dangers of failing to communicate clearly the family’s intentions have been highlighted, once again, in a case involving a Derbyshire family’s farm property.
James Spreckley, Head of the Rural Sector team at law firm Lodders, explains: “The case of Wild v Wild involved two generations of the Wild family and arguments about farm property at the family’s Beard Hall Farm.
“The farm was owned by father Ben Wild, and after his death a dispute arose, which reached the High Court late last year, involving his sons Gregory and Malcolm, their mother Jean, and Malcolm’s wife Abigail.”
The farm had been run as a family farming partnership at different times involving Ben and his wife Jean and their sons Gregory and Malcolm. On Ben’s death he had left the farm to his widow, Jean, but when one of the sons/brothers sought to dissolve the farm partnership, the question arose as to whether the farmland, farmhouse and a bungalow were part of the partnership assets.
“Had they been, then these would have been shared between the partners rather than belonging to Ben’s widow,” explains James. “There had been a farming partnership agreement through which the farming business had been run, but which was being dissolved by agreement when Ben Wild died.”
The first dispute concerned whether the farm, farmhouse and bungalow were assets of the farming partnership as argued by one of the brothers, Gregory, which if successful, would have entitled him and the other brother to a share of those assets.
“As there was no written partnership agreement to clearly record what was or wasn’t in the partnership, the Court had to look at the evidence of Ben’s intentions when he first went into partnership with Malcolm in 1978 who was 16 at the time,” says James. “Although the property was referred to in the partnership accounts, the family could not agree whether it was an asset, and with Ben having died and Jean being very unwell, there was little personal evidence of what had been intended at the time.
“Not being a partnership asset was significant, as essentially it meant the farm and other properties formed part of Ben’s estate and could be left under the terms of his will.
“There are often good reasons why partners will want property to be a partnership asset,” says James. “It could be to ensure it is clearly business property and therefore more likely to be eligible for business property relief and in turn, to reduce potential liability to inheritance tax. Or it could be to provide stability for the farming business on the death of the property-owning partner if the remaining partners have a right, in effect, to buy the assets from the estate, often over a number of years.
“The flip side of this though is that by making a property a partnership asset, the registered owner of the land loses the ability to deal with it and in particular to leave it under the terms of their will, since they will in effect be holding it on trust for the partners.”
In this case, the High Court ruled that the mention of the property in the farm accounts was insufficient to demonstrate a clear intention by the late father that it should be partnership property. The Court made the point that property can only become partnership property by agreement between the partners rather than by one partner deciding it should. In 1978 when the partnership commenced Malcolm was only 16 and the Court felt it unlikely Ben would have intended to lose control of the farm at that stage.
“As such and as the Court highlighted, on the death of Ben Wild, the property passed under his will to his widow to whom it then belonged, so, on dissolution, whilst other business assets were to be shared, the property was not.”
Highlights pitfalls & risks
James adds: “This case is another in a number of similar cases that highlight the pitfalls and risks that come from farming families not communicating clearly their intentions and not recording clearly and accurately how and by whom farm assets are owned or dealt with on death.
“There is no substitute for open discussion about these things and recording the agreed arrangements clearly and the use of a well-drawn up partnership agreement can really help head off these sort of disputes, help secure tax benefits and most importantly keep the farming assets together.”