Partnership Property
These are the notes from the seminar and workshop provided by Sean Kelly and Cait Sweeney to the Property Bar Association on 30th April 2024.
1. It is often thought that partnership claims revolve around issue of expulsion and the mechanics of winding-up. However, in most cases the major issues which have a monetary value concern the ownership of assets (and in particular land) used by or generated by the partnership. This will be the case whether the partnership is to be wound-up by the Court or the interest of a departing partner is to be bought under the terms of a partnership agreement. It would be rare for a partnership agreement to deal with land which is not partnership property.
2. In relation to land used by a partnership, the issues to be considered are (in order) as follows:
1) Is the land partnership property?
2) Is the land held at a joint tenancy or tenancy in common outside the partnership?
Partnership property
1) The nature of partnership property
3. Section 20(1) of the Partnership Act 1890 (“the Act”) provides as follows:
“All property and rights and interests in property originally brought into the partnership stock or acquired, whether by purchase or otherwise, on account of the firm, or for the purposes and in the course of the partnership business, are called in this Act partnership property, and must be held and applied by the partners exclusively for the purposes of the partnership and in accordance with the partnership agreement.”
4. No partner has any interest in specie in partnership property. Rather, each partner has an interest in the net balance of the assets and liabilities of the partnership as manifested in the capital account (see Popat v Shonchhatra [1997] CA, 1 WLR 1367). Accordingly, partnership property is something distinct from property held:
1) By one partner beneficially
2) By some or all of the partners as beneficial joint tenants
3) By some or all of the partners as beneficial tenants in common
4) Under some other specific trust arrangement.
Partnership property is to be applied for the business of the partnership while trading and, following dissolution, it is available to meet the demands of creditors (under section 39 of the Act) with the ultimate surplus to be distributed between the partners in accordance with the partnership agreement.
2) The significance of partnership property in winding-up
5. The significance of partnership property is tied-up with the manner in which accounts of a partnership are produced.
6. In the context of partnership law, “capital” is a sum of money which is invested by a partner in the business of the partnership on the basis that the same is not to be returned until dissolution (or ceasing to be a partner in a joint lives partnership). It is similar to the concept of capital in a limited company or an LLP. An “advance” is a sum of money which is loaned to the partnership which is expected to be repaid. At least as a matter of law the two are different and such difference is accepted by the order of priority of payments set out in section 44 of the Act.
7. Income profits arise out of the usual trading of a partnership. Capital profits arise from the sale of partnership property otherwise than as a result of normal trading such as the sale of the land from which it trades. Capital profits follow income profits save where the contrary is agreed expressly (which would be rare). Each is dealt with differently following dissolution.
8. On dissolution, the right of the departing partner to income profits ends. However, the departing partner can claim under section 42 of the Act either interest at 5% per annum on the value of his share in the partnership or the profit generated thereby. This is the “net” share, so that if the capital account of the departing partner is in deficit, he can not claim a section 42 account (see Sandhu v Gill [2006] Ch 456). The logical extrapolation from this decision is that the capital accounts of the partners have to be calculated to dissolution (using valuations if necessary) so that the departing partner’s claim to interest or profits can be quantified properly.
9. Section 42 of the Act does not apply to capital profits. Partnership property remains such until it is sold. The value of any partnership property in the accounts of the partnership is merely an estimate (and often a historic value). The value crystalises on sale (whether to a third party or one of the partners). On sale, the value in the accounts is replaced by the sale price and the capital profit which arises is divided between the partners in the capital profit sharing ratios over the period involved. Where there has been a change in profit shares over a number of years, the allocation of capital profits will be difficult.
10. A capital account in its strict sense is merely a statement of the amount of capital introduced by the partners. A current account in its strict sense is an account of what has happened since the partnership has commenced in terms of:
1) Undrawn profits
2) Advances made to the partnership
3) Expenditure incurred by the partnership for individual partners.
In practice, it is rare to find accounts for a partnership which distinguish between capital accounts and current accounts in any way. The only general exception would be old farming partnerships. The usual capital account is a combined capital and current account where the total of the capital accounts of the partners equates to the net assets of the partnership. “Capital account” is normally used to refer to this combined account. Accordingly, it is possible (and indeed quite common) to have a negative balance on a partner’s capital account.
11. There is no Statement of Standard Accounting Practice (“SSAP”) for partnerships. Accordingly, there is no requirement to revalue partnership property and strong tax reasons for not doing so. Accordingly, partnership land is often included in accounts at extremely low historic cost and the capital profits on sale will need to be dealt with in winding-up.
12. This logical analysis of the position does not accord completely with the decision of the Court of Appeal in Bathurst v Scarborow [2004] EWCA Civ 411. In this case, land was purchased during the course of a short-lived partnership in respect of which no signed accounts were ever prepared. Although it seems likely that the land was purchased with partnership funds, it was not alleged that this was the case. The conveyancing solicitors were instructed to purchase such land on a joint tenancy but the box on the transfer was not executed. At first instance, the Master held that the land was purchased as partnership property because this was the clear intention of the partners on the facts. The Court of Appeal overruled this finding of fact as it was clear that the partners intended that the land should be purchased by them as joint tenants. This is what the conveyancing solicitors had been asked to do. So far so good. The Court of Appeal then went on to suggest that partnership property could be held on joint tenancy without explaining how this might affect the sale of the same to enable the payment of creditors. Popat v Shonchhatra was not cited to the Court of Appeal in Bathurst v Scarborow and Bathurst v Scarborow itself was not cited to the later Court of Appeal in Sandhu v Gill (which followed Popat v Shonchhatra). It is suggested that this (obiter) part of the judgment needs to be treated with care.
13. The fact that the interest of a partner is reflected in his capital account means that a partner’s capital account can be considered to be an interest in property in its own right. Thus, capital accounts can be held as joint tenants and can pass by survivorship. This principle was accepted by the Court of Appeal in Hopper v Hopper [2008] EWCA Civ 1417 where the only issue between the parties was as to whether there was a joint capital account between father and mother, with children having separate capital accounts or whether there was a single joint capital account. It was suggested in argument that joint capital accounts are common. This may be overstating the case. They are not uncommon as between husband and wife in farming partnerships. Indeed, this arrangement has many benefits because it means that the death of the first spouse does not lead to a general dissolution. The partnership can carry on as before (see also Graham v Graham [2018] 5 WKUK 132, HHJ Pelling, KC).
3) Land becoming partnership property
14. Unless the business of the partnership is selling land, there is no requirement that any land which it uses should be partnership property. The land can be owned by one or more of the partners outside the partnership and made available to the partnership either by way of a lease or licence whether subject to payment or otherwise. The mere fact that land is used by a partnership does not make it partnership property (see Davis v Davis [1894] 1 Ch 393). Nor does paying the rent make a farming lease a partnership asset (see Eardley v Broad [1970] 215 Estates Gazette 823).
a) Land purchased before the partnership commenced
15. Where the land was purchased before the partnership commenced, it has to become partnership property. This can arise by express declaration of trust in the usual way and such an express declaration of trust will be binding (see Pettitt v Pettitt [1970] AC 777). The land would be transferred to A and B “as partners” or similar. This would be unusual. Such a declaration of trust can also be included in the partnership agreement. Otherwise, it is necessary to rely on the bringing in of the land into the partnership under section 20(1) of the Act.
16. The transfer of land into a partnership necessarily requires the agreement of all partners because the partner who transfers the land into the partnership will require credit for the value of the same as an addition to his capital account. Without such credit, the accounts will not balance in any event. While this agreement can be express or implied (see Miles v Easter [1953] 1 WLR 581, Harman J), an implied agreement is unlikely to arise in the case of land as land can be made available to the partnership in a variety of ways. Section 20(1) of the Act is in effect a conveyancing section (see Wild v Wild [2018] EWHC 2197 (Ch) HHJ Eyre, KC). There needs to be an agreement to bring the land into the partnership and section 20(1) of the Act avoids the need to comply with section 2 of the Law of Property (Miscellaneous Provisions) 1989.
i) Bookkeeping entries
17. It is unclear whether bringing in needs to be accompanied by appropriate bookkeeping entries. Physical assets such as stock or machinery can be “brought in” to the partnership by delivery to the partnership premises. However, land does not move. All of the leading cases involve situations where the accounts show land as a partnership asset and the Court has been asked to determine whether this is sufficient evidence of an agreement to bring in. It is unlikely that there could be an agreement to bring in without this being accompanied by bookkeeping entries.
18. In practice, it can be very difficult to show bookkeeping entries to record the bringing in of land into a partnership. Invariably, the problem is the starting position. The accountant who produces the first accounts of the partnership ought to record the individual pieces of land which (when combined) give rise to the total land value. However, this is rarely the case for farming partnerships. The record (if made) might well become lost. Accountants also tend to treat money spent on improvements to land held outside the partnership as land investments of the partnership which can provide a further complication.
ii) Evidence of agreement
19. It is often assumed by clients that the bookkeeping entries themselves will provide sufficient evidence of an agreement to bring land into the partnership. Surely, that is the whole point of the exercise. Clients tend to assume that this is the case. This is not the way that the Court looks at the matter. Accountants who produce partnership accounts rarely have access to conveyancing documents and accountants often assume that all land used by a partnership is partnership property. In a line of cases starting with Barton v Morris [1985] 1 WLR 1257 and ending with Wild v Wild, the Court has refused to accept bookkeeping entries as reliable evidence of an agreement to bring land into the partnership. Insofar as it is evidence, it has to be weighed against other available evidence. As no partner has an interest in specie in any part of partnership property, statements made by a partner that he has an interest in a specific piece of land (whether by including it in his Will or in a trust document) may provide a strong rebuttal to the contention that the land is partnership property.
b) Land purchased during the partnership
20. Section 21 of the Act provides as follows:
“Unless the contrary intention appears, property bought with money belonging to the firm is deemed to have been bought on account of the firm”
21. This provision usually deals with the ownership of land bought using partnership funds. A contrary intention will only appear if there is an express declaration of trust or evidence that this is what was actually intended by the partners. Contrary intention is not merely failure to include land within partnership annual accounts unless that failure is intentional (see Mehra v Shah [2004] EWCA Civ 632)
22. There are a number of issues relating to whether in any particular case property is bought with money belonging to the firm. These are as follows:
1) Partnership funds can only be used if the partnership has a bank account or payment can be otherwise proven.
2) The section is dealing with monies owned beneficially by the partnership at the date of the purchase. Monies taken by a partner as agreed drawings and then applied by him in buying property are not monies of the partnership. However, it is not clear whether this principle applies to drawings which are not agreed. In practice, monies misappropriated by a partner are treated as drawings when the next annual accounts are drawn up (because there is no other way of making the accounts balance). The accountants with often do this without explaining what has been done. In James v James [2018] EWHC 43 (Ch) the Court accepted at face value the fact that monies used by one partner had been treated as his drawings and that such drawings had been used to buy land as indicating that such land was not partnership property. There was no analysis of whether the drawings were agreed.
3) The section is most obviously directed at one off purchases. It is far from clear
that the section applies to a situation where one partner buys land with the
assistance of a mortgage and the partnership pays the sums due under the
mortgage. It can be easily inferred that such payments are to be treated as rent
(see Morton v Morton [2022] EWHC 163).
4) Land transferred out of a partnership
23. Section 2 of the 1989 Act (relating to the agreement for the sale or an interest in land) and section 53 of the Law of Property Act 1925 Act (relating to the actual transfer of an interest in land) need to be considered in respect of each transaction whereby land is to leave a partnership. Section 20(1) of the Act is a one-way ticket in.
24. Where parties agree to a transfer of a share of a partnership, whether on dissolution or retirement, section 2 of the 1989 Act must be complied with if the partnership owns land. Where an option is granted by one partner to another to sell or purchase another’s share, the option must also comply with section 2 of the 1989 Act if the partnership includes land.
25. Strictly, any transfer of an interest in land into or out of a partnership must comply with section 53 of the 1925 Act. The fact that there is no written transfer may indicate that there was no actual agreement for the transfer of land into or out of the partnership. The strength of this indication will depend on the extent to which the partnership otherwise complied with legal formalities. If the parties agree that land is to be transferred into a partnership and act in reliance upon the fact that it has been, then it is very likely that an estoppel will be found to this effect. This is probably why points based upon section 53 of the 1925 Act are rare.
5) Rights of occupation
26. If the land is not an asset there has to be some right to occupy. There will not be a lease implied for the benefit of a partnership which occupies land which is not a partnership asset. The use made of it by the firm and all the partners is given effect to by the creation of implied ‘non-exclusive’ licences to the partners, not to the partnership (see Harrison-Broadley v Smith [1964] 1WLR). These licences will not be determinable during the partnership if it is inconsistent with the duty of good faith. On dissolution given the right of all partners to wind up the firm, the licences will continue for this purpose
6) Rules for determining whether non-land assets are partnership property
27. The fact that an asset is not capable of being sold does not prevent it from being partnership property (see Don King v Warren CA [2000] Ch 291). The partner in whom it is vested will have to account for its value. Non-alienable assets cannot be sold as part of winding-up. However, the partner in whom they are vested can be made to account for their value.
28. Miles v Clarke is an important case because it is often assumed that all of the non-land assets used by a partnership in the conduct of its business will be assets of the partnership. This will be the case where the asset is bought using the funds of the partnership. Otherwise, the asset will only be a partnership asset by implication is this is required as a matter of business efficacy which will be unusual.
7) Property generated by the partnership
29. Where an asset is generated by one partner through his position as a partner, there is no presumption as to whether such asset is partnership property. The Court will have to determine whether there is an agreement to this effect (see Goldup v Cobb [2017] EWHC 526 (Ch).) In this case a partner in a solicitors practice acquired pension rights as a result of being a coroner. Income derived from such position was treated as partnership income. However, the Court held that the pension rights which had accrued to such partner were not partnership property because there was no agreement (express or implied) to this effect.
8) The sale of partnership assets after winding-up
a) Presumption that all of the assets of the partnership should be sold
30. Following dissolution the Court has the power to order the sale of all of the assets of the partnership (including land) and will usually do so because to do otherwise would or might deprive the former partners from realizing the maximum return from the assets of the partnership. The practice is only departed from in two situations, namely (i) when a Syers v Syers Order is made and (ii) where the sale of the partnership assets would offend statute or would otherwise be difficult to achieve
31. It follows that in many cases it will be obvious that there will need to be a sale of the assets of the partnership and that the winding-up of the partnership cannot commence in proper without such sale. Although the current editors of Lindley state that the practice of the Court is not to order a sale at an early stage of a partnership dispute, this is not the practice of the Court. Unless there is some good reason why a sale would not be ordered at the trial of the claim, there is no good reason to delay a sale until such time. For example, if the issue between the partners is whether the profits are to be shared equally or one third two thirds, there is no good reason why the sale should be delayed until the trial. Obviously, of there is an issue as to whether a particular asset is a partnership asset, the sale might not be ordered until this issue has been determined. However, if the issue is whether the asset is partnership property or held as tenants in common in equal shares, sale might well be ordered as the Court has power to order sale of assets held as tenants in common in any event (see Bagum v Hafiz [2016] Ch 241).
b) Method of sale
32. In principle, there is little difference between the conduct of the sale of partnership assets and a sale of co-owned assets. Any partner will be allowed to bid and the likelihood that a particular partner may bid will affect which who has conduct of the sale. A partner cannot bid and have conduct of the sale. The only concern of the Court is that the assets of the partnership should be sold at the best price reasonably obtainable in the circumstances. It is common for one partner to be given conduct of the sale on the basis that he will sell at or above a particular price provided that his agent considers that the price is the best price reasonably obtainable in the circumstances (which is a deliberately vague expression).
33. It would be normal practice to allow a purchasing partner P effectively set off his share in the partnership against the price which he has to pay for a particular asset. P would agree to pay the purchase price and this would be included in the accounts as the value of the asset concerned. P’s capital account would be adjusted accordingly and would be set off against the purchase price. P would normally be expected to pay a deposit pending the calculation of the set-off.
c) Syers v Syers Orders
34. The majority of partners (either in number or by partnership share) may apply to the Court for an Order that they be entitled to buy out the minority usually at the date of dissolution at a price to be determined by the Court. As remarked by Hoffmann LJ in Hammond v Brearley [1992] WL 12678533, Syers v Syers is more often cited than applied. It is an unusual order because it deprives the minority of the ability to test the market so as to ensure that the assets of the partnership are sold at the best price obtainable.
35. A Syers v Syers Order was made in Mullins v Laughton [2003] Ch 250, Neuberger J. In Mullins the partnership was a joint lives partnership where the defendants had attempted to expel the claimant for breaches of the partnership agreement. The claimant sought the dissolution of the partnership under section 35 of the Act. This was granted, but the Court gave the majority the opportunity to buy out the claimant at a valuation. There are a number of unusual features of the case which make it easy for the Court to make a Syers v Syers order. These were as follows:
1) The application was heard at the same time as the partnership was dissolved.
2) The majority could have expelled the claimant if they had properly used the procedure of the partnership agreement
3) There was no real opposition to the making of the order and no suggestion that the assets of the partnership could not be valued easily.
36. A Syers v Syers Order was refused in Benge v Benge, 13/02/17, Murray Rosen, KC where there was a real risk that a valuation would not achieve the result achievable on a sale in the open market.
37. Where the Court makes a Syers v Syers order, the usual rule is that the sale will take place following the order. However, the order can be retrospective so that the assets of the partnership are deemed to have been sold on dissolution. This may be an advantage for the departing partner in that retirement relief for CGT can be retained.
Land bought for business purposes
38. Once it has been determined that land has not been bought as partnership property, it is necessary to determine whether it has been purchased as joint tenants or tenants in common. As always, a declaration of trust will determine the issue. However, if there is no declaration of trust, how is the issue to be determined.
39. In a domestic context, the starting point is that equity follows the law. Where land is transferred to A and B, the initial starting point is that they hold the same as joint tenants (see Stack v Dowden [2007] 2 AC 432) and Jones v Kernott [2012] 1 AC 776). However, where land is purchased for business purposes, the starting point has always been that survivorship is not to apply as this is inconsistent with a business relationship. In Williams v Williams [2024] EWCA Civ 42, the Court of Appeal held that the presumption relation to business purchases still applies as no purchase could be approached “in a vacuum”.
40. Accounts of a partnership do not operate as severance of joint tenancy (see Bartin v Morris).
