UK: The Perils Of Partnership

Last Updated: 12 September 2017
Article by Brodies LLP

The recent case of Peter Oag (applicant) v the Executors of the late William Robertson Oag (respondents) SLC 172/12 reached a conclusion in the Scottish Land Court on 20th June 2017. It provides a stark warning to those who are tenants of a lease in favour of a partnership. The central issue was whether the lease of Brims Mains and Burn of Brims ("the Farm") was a lease to the partnership of "W and A Oag" or a lease to Mr & Mrs Oag as individuals.

It is essential for those involved in structuring land and rural business transactions to know whether assets are personal property or property pertaining to the partnership. This is important, both for the purposes of lifetime planning and in assessing rights on death. This article provides a brief summary of the facts of the case and explains the decision reached by the Court.

Peter Oag Snr and his wife Jessie Martin Oag leased the Farm to their son William Oag and his wife, Mrs Ann Oag, who were farming in partnership, on 7th September 1982. Peter Snr, Jessie and William Oag are now all deceased but the case was brought by Peter Jnr to whom ownership of the Farm passed by disposition from Peter Snr and Jessie Oag in his favour in 1989. At this point, Peter Jnr became his brother and sister-in-law's landlord. Peter Oag Jnr, on the death of his brother, sought to have the lease of the Farm declared to be at an end.

This was on the basis that the lease was to the partnership of W & A Oag and that partnership – and therefore the lease – terminated with a change in the partnership by (1) the assumption of one or more of William and Ann's sons into the partnership, and (2) the subsequent death of William. The respondents in the case argued that they had succeeded to their late father's interest in the lease.

The Court's role was to resolve the conflict by identifying the parties from the terms of the lease as opposed to reviewing external evidence. The only part of the lease where there was any attempt to define the parties was in the instance, where it read:

"MINUTE OF LEASE between PETER OAG, Senior, and Mrs Jessie Martin Oag, both residing at West Park House, Wick (hereinafter referred to as "the landlords") on the one part: and WILLIAM ROBERTSON OAG and MRS ANN OAG, both residing at Brims Mains, Thurso, farming in partnership under the firm name of W. and A. Oag at Brims Mains aforesaid (hereinafter referred to as "the tenants") on the other part."

The Court was mindful that it needed to read the lease as a whole; throughout the lease reference was made to "tenants" in a plural context as opposed to "tenant" singular, which would have been appropriate if the lease had referred to a partnership as a single entity. The irritancy clause in the lease also said that "if the tenants or either of them" became bankrupt then the lease would be capable of being brought to an end. The lease did not say "the partners or either of them" which would have been more accurate in a lease to a partnership. On review of the instance in the lease, there would have been no reason to make reference to "farming in partnership" unless the lease had intended that the Farm was being leased to the partnership.

The testing clause of the lease was also examined to ascertain any clues as to the intention of the parties. The lease had not been signed "on behalf of the partnership" as would be necessary in a contract involving a partnership, it was merely signed by Mr & Mrs Oag. Following case authority, it was held that the testing clause served a limited purpose in interpreting the lease, other than outlining the subscribers of the document and recording the details of the witness, date and place of signing. This meant that although the parties had signed as "individuals" as opposed to "partners", and, that neither party had signed the firm name, these facts were not decisive in this case.

The Court found that (1) the clearest indication of the tenant's identity is the description given in the instance in the lease and that referred to the tenant as being the partnership, (2) the rest of the deed contained nothing necessarily contrary to that interpretation and (3) the tenant was the partnership. The effect was that because one of the partners had died, the partnership had come to an end and thus the lease fell.

This case serves as a stark warning to those farming in partnership that partners should be clear whether they are contracting as partners or as individuals. The respondents could not have predicted the importance of the designation of their tenancy in 1982, but perhaps this case will provide a salutary lesson to others to make sure their agreements, wills and formal documentation are checked by an experienced lawyer in good time so that there is an opportunity to plan accordingly.

The lesson is to clarify the position at the outset, rather than leaving matters to be disputed on death or dissolution of a firm. This could have minimised the risk to the farming business, protected the tenancy and, in turn, lessened the financial impact on the parties involved.  

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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