Partnership agreements - take the time to review yours!

A partnership agreement is an important document for all individuals conducting business together as a partnership. Without one, the relationship between the partners and the partnership itself is governed by legislation written in the 1890s! Once you have one in place (and I would highly recommend that you have one), it is just as important to keep it up to date. There are certain events that should trigger a review of your partnership agreement. These include:

Partners leaving

A partnership agreement should already cover what will happen when a partner retires, although many are not robust enough to cover the uncertainty that follows a partner leaving. The retirement of one partner can often lead to the retirement of another, creating a domino effect and a “last man standing” situation. To mitigate the effect of this, a partnership agreement can be drafted in a way that limits the impact of numerous partners leaving. For example, a clause may be included in the agreement limiting the number of partners who can retire in one accounting period.

New partners

When a new partner joins, it is essential that your partnership agreement is updated. You should ensure that the incoming partner signs up to your partnership agreement so that the individual is bound by its terms. Failure to do so may lead to a dispute over whether the terms of the agreement apply to the new partner, and raise suggestions that you are operating as a Partnership at Will.

Changes in property ownership

If there are changes to how the property used by the partnership is held, it is important to review your partnership agreement and the title document for the property in question. You should avoid situations where the lease or freehold title to the property remains in the name of former partners, or where your partnership agreement fails to identify how to value and pay out an outgoing partner’s share in a property. 

Disputes

If your partnership agreement has clear terms, then disputes between current and former partners should be rare. However, if you have experienced disputes in the past, then it may be time to consider changing the terms of your agreement in order to avoid similar problems arising in the future.