Having a succession plan in place is crucially important for farming families, as it can help prevent serious disagreements and the emotional turmoil that can come with them, as well as the cost of solicitors’ fees if those disagreements end up in court.
Speaking in the Farm of the Future webinar, ‘Planning for succession: Why, when and how’, litigation solicitor Esther Woolford from the Clarke Willmott agriculture team shared how disagreements around farm business succession can end up in the courts. She said:
“In a farming family, the business is interwoven into the fabric of the family, and agreements can be reached around that kitchen table, but not documented, and unfortunately, sometimes disputes may follow.”
Common scenarios that can happen when there is no clear plan for succession in place include:
No clear succession plan and no written partnership agreement in place
In these situations, significant steps can happen for the business, such as the joining of a family member as a partner or moving the farm onto the balance sheet of the farm accounts for tax reasons, but without any clear terms agreed as to how to resolve differences. The Partnership Act from 1890 applies in these situations, but it does not cover all modern scenarios that might arise between partners. Under the Act, if you are going to make a fundamental change then you need unanimous agreement between partners, so if unanimity isn’t reached, the result is a stalemate.
No provision in partnership agreement about a partner’s exit from the business
The common occurrence in these situations is that one partner will seek to dissolve the business. They will apply for dissolution of the business, which means sale of the assets on the open market. Without a partnership agreement in place, the remaining partner does not have the right to buy out an existing partner.
When selling on the open market, the partnership business may or may not include the farm as an asset of the partnership, and it can be a very thorny issue as to whether or not it has become such an asset. The default position under the Partnership Act is that the court will most likely seek to sell those farm assets on the open market, because the only truly fair way of establishing value is by going to the open market. The continuing partners may have a shock to discover that actually, in order to buy back the farm, they need to go along to the auction house and bid alongside everybody else, meaning there is a significant risk that they might be outbid in that auction process and be unable to buy back the farm or any of their farming assets.
Proprietary estoppel
Proprietary estoppel is a legal doctrine that can apply in farming families when a promise or representation has been made to a family member about inheriting the farm, and they have relied on that promise to their detriment.
If a promise or representation has been made to a farming child that they will inherit the farm one day, and they have acted on that promise, for example by working on the farm for many years for little or no pay, the courts may find that an equity has arisen. This means the court can order that the child is entitled to the farm, or a share of it, even if it goes against the wishes of the parents in their will. The courts will look at whether it would be “unconscionable” for the parents to go back on their promise, given the child’s detrimental reliance on it.
Avoiding litigation
In short, litigation should be avoided at all costs. Succession planning as a family is key to preventing disagreements ever ending up in the courts. This starts with having open conversations about the future of the farm, and then must be followed up with ensuring the legal documents are drafted and signed, so they are in place ready for when they are needed.
To hear more from Esther, including examples of real cases which went to court, watch the recording of the webinar in the RASE members’ area. Not yet a member? Find out about joining here.