Breakdown at family farm can be painful and costly warns lawyer

Farmers could risk losing their business if they do not take legal steps to protect their assets in the event of divorce or other relationship breakdown, according to a leading agricultural lawyer.

Sarah Baugh, a partner and head of agricultural and rural affairs at Midland law firm MFG Solicitors, says farming families face unique difficulties when relationships go wrong.

It can be complex and costly to resolve such disputes – and the very future of a family business could be threatened unless the right legal arrangements have been put in place.

"How a family farming business can be broken up depends hugely upon how it is set up in the first place," she said.

"Setting things up correctly at the start of any farming endeavour is the key to saving innumerable headaches and heartaches when it’s time to bring things to an end.

"It’s not just wives falling out with husbands and vice versa – children fall out with their parents, brothers fall out and in-laws frequently do the same, which means that we do not always have the principles of divorce law to fall back on.

"There are also cases where family members have not fallen out with each other, they just see the future differently, have different business ideas and want different things."

The options for family farming enterprises, said Ms Baugh, included setting up a farming partnership, a family company or a limited liability partnership.

"Limited liability partnerships can work for farmers just as they do for professional firms, although they have not yet been widely adopted in the agricultural sector," she said. Farming partnerships remained the most popular form of family business structure.

"However, farmers should be aware that under the law co-ownership of property does not necessarily create a partnership.

Two people who happen to own a piece of farmland are not automatically a partnership."

"On the positive side farming partnerships are flexible over the splitting of income. They are a good way to ease children into the family business and for sharing profits and responsibilities.

"They are tax efficient because they provide a vehicle for Capital Gains and Inheritance Tax advantages.

"The downside of farming partnerships is that legal liability is joint and several – and it involves complex record keeping."

Detailed legal input was required to decide how a Partnership Deed would operate.

Key factors could include who owns the assets, how profits and losses are to be allocated, how disagreements are to be resolved, how shares can be altered, the rules on transferring assets into and out of the partnership and the principles that should apply on dissolution.

Julia Bond, head of MFG’s family law team in Telford and an associate partner of the firm, added that in the event of a marriage breakdown within a farming family business the basic principles were enshrined in the Matrimonial Causes Act of 1973.

When deciding on the best way to proceed, the court would first consider the welfare of any children under 18, but other factors could include the income and earning capacity of the parties, their financial needs and responsibilities, their previous standard of living and the contribution they had made to the welfare of the family.

Miss Bond added: "Certain factors are more relevant than others. The court will always consider the parties’ housing needs as well as respective incomes.

"Conduct is only relevant in the most exceptional of circumstances, which comes as a surprise to many divorcing couples. Fault is completely irrelevant.

"One issue is peculiar to divorce farming cases. The Court may depart from the usual position that the starting point will be an equal division of the assets of the marriage.

"It may do so to avoid the sale of a farm, even after a long marriage, where the farm has been held by the family for generations and was expected to remain in its current form.

"The Court has accepted that farming is ’a way of life’ and therefore this has been held to mean that there was an unequal division of the matrimonial assets to ensure that the farm remained intact."