Early discussion essential when negotiating future of limited partnership tenancies – code of practice for limited partnerships

We explore the negotiating future of limited partnership tenancies and what the code of practice should be for limited partnerships.

9 October 2017

This article originally appeared in Farm North East, Issue 83, October 2017

Prior to the introduction of fixed duration tenancies by the Agricultural Holdings (Scotland) Act in 2003, in order to avoid security of tenure it was common for agricultural tenancies to be granted in favour of a limited partnership.  The limited partner would be the landlord or the landlord’s nominee and the general partner would be the farmer who was to undertake the actual farming operations on the farm.  The limited partnership had a separate legal personality and was set up for a fixed period of time.  The limited partner had liability for the debts of the partnership only to the extent of their original nominal capital contribution and the vast majority of the profits generated by the partnership went to the general partner.  

Security of tenure
This was a device to control security of tenure because the limited partnership could be brought to an end by the limited partner.  Limited partnerships were set up for a fixed number of years and, thereafter, rolled on from year to year subject to being brought to an end by notice served by the limited partner.  

The 2003 Act gave limited rights to general partners who had their limited partnerships terminated by allowing them to serve a counter notice which extended their occupation for a further 3 years after expiry of the notice but at the end of that period, they had no option but to surrender vacant possession of the farm. There are about 500 – 600 limited partnership tenancies still in existence in Scotland. 

The Tenant Farming Commissioner, Bob McIntosh, has now issued guidance with regard to how parties should negotiate the future of limited partnership tenancies. The guidance is available on the Scottish Land Commission website

Key principles
The guidance sets out certain key principles.  These are that discussions about the future of a limited partnership should, whenever possible, take place well in advance of the termination date.  The wishes of both parties about the future of the arrangement should be discussed before any arrangements are finalised.  All options should be considered in an attempt to meet the wishes of the landlord and the limited and general partners and to support the future sustainable management of the holding.  Either the general or limited partner can initiate a review of the limited partnership and should do so in writing setting out the reasons why a review would be beneficial to both parties and that should be made well enough in advance of any scheduled or anticipated end date.  A review should be initiated at least 12 months before such an end date and before a termination notice is served, if such a notice is necessary. 

The parties should meet within a month of the review being initiated and the discussion should include consideration of any change in the circumstances which has taken place since the limited partnership was established, the wishes of the limited partner about the future of the holding, the wishes of the general partner about termination or continuation or the possibility of switching to a fixed duration tenancy and such a meeting should be recorded in writing.  If the meeting doesn’t result in an agreed way forward, the parties should agree to meet again once the party proposing a change to the current situation has set out in writing the proposed new arrangements in as much detail as possible.  The parties should continue the discussions until agreement is reached or it becomes clear that agreement isn’t possible.  The parties should aim to complete discussions within six months. A termination notice should always follow the discussions which have previously taken place and should never precede them.

It should be noted that these are recommendations by the Tenant Farming Commissioner about good practice and are not formal legal requirements.  However, if the recommendations are not followed, it would allow either side to make a complaint to the Tenant Farming Commissioner who has power to censure someone who is found to be in breach of the code. Such a finding doesn’t have legal consequences attached to it but could, for example, be of considerable professional embarrassment to agents and is likely to be quite a powerful incentive for compliance.

Rational discussion
The code does not provide that limited partnerships should be presumed to continue either as limited partnerships or via a fixed duration tenancy but it is designed to ensure that the parties have a rational discussion about the future well in advance of any termination date so that parties will know exactly where they stand and will be able to organise their affairs accordingly.