The experience of creating a partnership deed should be welcomed, rather than feared, on the basis that it can only serve to strengthen your business and hopefully your relationship with your partners. Here are common mistakes to avoid in partnership agreements:
Keeping your partnership deed as short and simple as possible.
There is a myth that a simple precedent partnership deed must exist somewhere which can apply equally to every partnership (and, no doubt, a further myth that it is the partnership solicitor who endeavours to make this situation as complicated as possible). This is wrong on both counts.
Each partnership is unique and requires a deed which accurately reflects its own circumstances.
Furthermore, it is a mistake to think that you are doing yourselves a favour by insisting on a short deed. By definition, the shorter the deed, the less detail it can contain; given the purpose of a partnership agreement is to tie the partners together for the duration (and to prevent a sudden dissolution), the greater the detail contained within the deed, the less likely it is you would find yourselves in dispute over a previously unconsidered issue.
Partners often report that the exercise of having to consider the detail in the course of preparing their deed is a cathartic exercise in itself and can often highlight and eradicate burning issues.
Believing a partnership with a new partner commences only upon successful conclusion of their probationary period.
It is surprising how many practices assume that a partner’s probationary period is something other than a partnership. It would rather defeat the object of testing the individual’s aptitude to perform as a partner if they were not, in fact, performing that role.
Ensure the new partner has signed up to a partnership deed before the first day on which the probationary period starts. The deed itself can provide for either the individual partner or the other partners to serve short notice upon each other allowing the partnership with that individual to end more quickly than under the usual notice provisions and without the departure impacting upon the continuing partnership.
Presuming a surgery with a capital value is nothing more than a one-line entry in the accounts.
Some non-specialist accountants may view a surgery with a capital value as nothing more than a one-line book entry – and in particular (on the basis it is used by the partners as a whole), assume all entries associated with the surgery (including rent reimbursement received and any loans) should be applied ‘across the board’.
It is extremely unusual for the owning partners’ shares in the surgery to remain completely in step with their partnership shares throughout their life with the practice, not least as partnership shares may change frequently to reflect changes both in partners and in sessional commitments.
By contrast, an individual partner’s share in the surgery is unlikely to change often, not least because each change in shareholding necessitates the following:
- The agreement of an up to date valuation.
- A variation of any existing mortgage.
- The application for a further mortgage to support the purchase of an increased share in the equity.
- The payment of CGT by a selling Partner.
- The possible payment of SDLT (although hopefully this can be avoided) and Land Registry fees.
- Professional fees in support of all these changes.
On this basis, you must reflect each owning partner’s share in the property as distinct from his partnership share-holding. Because the surgery is the largest and most significant asset, coupled with the risk a partnership deed may become invalid, it is best practice to deal with property ownership in a separate ‘declaration of trust’.
Expecting expulsion notices to be accepted unchallenged.
Most partnership deeds set out grounds which may be used to justify the expulsion of a partner. However, it is often assumed that the simple act of serving a notice upon a partner is the end of the problem. What is not understood is that the enforcement of an expulsion notice can be extremely difficult to achieve.
Very often (and unless a very blatant breach of the deed has been committed), a partner served with such a notice will contest it, alleging the grounds relied upon have not been proven. It is not surprising people challenge a notice, given the alternative is the immediate termination of their livelihood.
For this reason, it is a wise precaution to include a ‘geen socks’ compulsory retirement clause, supported by a suspension provision, within the deed. This provides the partners with the power to retire an individual partner without the requirement to demonstrate a specific breach of any of the expulsion grounds. While it would usually require the service of a reasonable period of notice (for example, six months) this may be accompanied by a suspension for a similar duration.
These provisions may not be found in standard agreements and it is important to consider their careful drafting for inclusion.The added benefit of the inclusion of a ‘green socks’ clause is that the very threat it could be enforced, often assists to dissuade a maverick partner from seeking to plough his own furrow.
Neglecting to keep partnerships up-to-date.
Signing a partnership deed, breathing a sigh of relief and thinking ‘that’s done for the next decade or so’ is a common mistake and could cost you dearly.
Depending on the circumstances, a deed may be at risk of becoming invalid almost as soon as it has been signed and should be kept under regular review. The most common reasons for a Deed to become invalid are a change in the constitution of the partnership or the circumstances of the practice, to the extent the deed, as drafted, no longer applies to the new circumstances.
A well-drafted deed will usually provide for the retirement of a partner without disrupting the relationship between the ongoing partners, but the admission of a new partner will almost always cause the deed to become invalid, unless there is evidence to demonstrate the terms of offer have been incorporated and that the new partner agrees to be bound by the deed.
Established case law demonstrates that it is not possible to have a ‘two-tier partnership’ and for this reason it is essential to ensure your deed is updated upon the admission of a new partner.
It is good practice to review your deed at least annually (perhaps at your accounts meeting) even if you believe nothing has changed, as you may be surprised at the result. Even if no change is required, it is also good practice to minute that the partners agree the deed in its current form remains up to date – and therefore binding upon each of them.
- Lynne Abbess is a partner at specialist healthcare solicitors Hempsons