Partnership agreements are often forgotten especially where the partners are all family members. The case of John Ronald Ham v Ronald William Ham & Lorna Jean Ham [2013] EWCA Civ 1301 highlights the importance of having a well-constructed partnership agreement in place.
In 1997 Mr and Mrs Ham, who were established dairy farmers, brought their son John, then aged 19, into partnership. The partnership assets were some 440 acres of land, a sizeable dairy herd together with farm machinery and other assets. The partnership commenced on 1 October 1997, and a partnership agreement was signed on 15 December 1997. One of the provisions within the agreement was the entitlement of any of the partners to terminate the partnership with three months written notice, in the event of which, the remaining partners were entitled to buy out the partner giving notice.
John Ham gave notice in February 2009 and the dispute concerned the basis on which the buy-out was to take place.
At the initial court hearing in March 2013, HHJ McCahill QC interpreted the provisions in the agreement such that John’s share would be determined on the same basis as annual accounts were drawn up, rather than on the basis of an up-to-date market valuation of the partnership assets. This had particular relevance as the land values were stated at historic cost, rather than the substantially higher open market value.
On appeal, all three judges ruled that the section of the partnership agreement relating to the right to serve notice of termination should be interpreted in the context of termination of the partnership. The value attributed to the partner’s capital account in the normal ongoing partnership accounts, which would be represented by capital and profits, was found not to be the relevant ‘net value’ of the outgoing partner’s share on termination. On this basis, the appeal was allowed and the value of John’s share was determined on the basis of the market value of the assets, including the land, at the termination date.
In closing comments, Lord Justice Briggs stated that "It is unfortunate that a matter of such importance should have to turn on an anxious and difficult consideration of factors pointing in different directions". He went on to say that, "It is to be hoped that, in future, those preparing such agreements will take note of the anxiety, expense and delay which such unnecessary uncertainty can cause".
Comment
This case provides an important lesson for family partnerships and underlines the need for well-drafted partnership agreements, even in cases where at first it may seem unnecessary to go to such lengths. Existing agreements should also be reviewed, particularly for farming partnerships, or where there are assets increasing in value, such as land and property. The review should ensure that in the event of disagreements, the intended outcome will be achieved.
There is a further reason for a well thought out and worded partnership agreement. What is partnership property and what is personal property in order to determine the rate of Business Property Relief available, for Inheritance Tax purposes. The former is entitled to 100% relief and the latter 50%.
Useful guides on this topic
Partnership agreements: What should be considered?
Partnership agreements can be invaluable to clarify everyday matters and settle disputes within a partnership. What sort of things should be discussed for inclusion in a partnership agreement? Why are they important?
External Link
John Ronald Ham v Ronald William Ham & Lorna Jean Ham [2013] EWCA Civ 1301
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