A partnership tenancy can be risky when it comes to change

Hamish Lean, Partner and Head of our rural property team, discusses the problems that can arise when partnership tenancies change.

31 January 2022

I’ve had a number of queries recently about agricultural tenancies where a partnership is the tenant rather than an individual. This can often give rise to problems and I thought that it would be worthwhile spending some time looking at some of the issues that can arise and how they might be resolved.

First of all, in Scots law, a partnership is a separate legal person in its own right quite distinct from the individual partners in the partnership. It is perfectly competent for a partnership to be a tenant in an agricultural tenancy.

Family farming partnerships are one of the most common means of family farming businesses organising their affairs and accordingly, tenancies in favour of such a family farming partnership are not uncommon.

There can be serious consequences for the tenant however where the tenancy is a partnership. The danger occurs when there is a change in the identity of the partners.

The normal rule that applies is that if there is a change, for example, by a partner dying or retiring out of the partnership or a new partner being assumed into the partnership, then this is regarded in the eyes of the law as a new partnership.

Remembering that a partnership is a separate legal person, the new partnership is not the same tenant that the tenancy was granted to in the first place. That being so, the tenancy comes to an end because the original tenant no longer exists.

There have been a number of cases over the years which have looked at this issue and whether or not a tenancy in favour of a partnership can continue beyond a change in the identities of the individual partners making up the partnership.

The cases have established that for the tenancy to survive there must be very clear unambiguous wording in the lease that it is granted in favour of a continuing partnership regardless of changes in the identity of the individual partners. Such leases do exist but they are uncommon.

An argument along these lines is impossible where the tenancy exists by operation of law and there is no written lease.

There is a grave risk therefore to a family farming partnership which holds a tenancy in the partnership that the tenancy will be brought to an end in the event of a change in the members of the partnership. This can lead to unfortunate results.

Partners are “locked” into the partnership, unable to resign for fear of breaking the tenancy and new partners can’t be assumed.

However, nothing can prevent the inevitable march of time and the death of a partner will bring the lease to an end. The only way of preventing this is to agree with the landlord that a change in the individual members of the partnership will not have this result.

The landlord might be very reluctant to agree to this if the tenancy is a secure agricultural tenancy governed by the Agricultural Holdings (Scotland) Act 1991, because to do so would create a tenancy that might never be brought to an end.

Quite often, I’m asked to advise on situations where a tenancy was granted in favour of a partnership where changes within the partnership have taken place over the years and where the tenancy was not granted to a continuing “house”. These situations are quite often very difficult to unpick.

However, if a partnership was a tenant and it consisted of a husband and wife and they later assumed their daughter into the partnership that would create a new partnership.

The original tenancy would have been brought to an end but if the landlord allows the new partnership to continue in occupation and accepts rent then a new tenancy would have been created by operation of law. If this new tenancy was created after the coming into force of the Agricultural Holdings (Scotland) Act 2003, which introduced fixed duration tenancies, the landlord will be able to serve notices to recover vacant possession.

It’s for these sorts of reasons that I tend to advise family farming partnerships not to take on tenancies in the partnership name but in the name of one of the individual tenants.

It is also prudent for the partners to agree between themselves in the partnership agreement how the tenancy is to be dealt with and if it is surrendered for value that there is an obligation on the particular partner who is the tenant in such a situation to account for the value received to the partnership as a whole.

As usual, people who find themselves in this situation are well advised to take legal advice.

For more information, please contact Hamish Lean, at hamish.lean@shepwedd.com, or your usual Shepherd and Wedderburn contact.