Stronachs LLP
Tenancies in Favour of Partnerships I have dealt with a number of cases recently where the ten‐
ant under an agricultural lease is a family farming partner‐
ship and it is clear that the legal implica ons and conse‐
quences of this being the case are not well understood by the industry. I am not referring to tenancies in favour of limited partnerships where the limited partner is the land‐
lord or a nominee of the landlord. These were set up in or‐
der to avoid the tenant having security of tenure because the landlord was able to control the life me of the limited partnership. Instead, I am talking about a tenancy in favour of a family farming business which happens to be conducted by a part‐
nership. A typical example would be a father and son or husband and wife who have entered into partnership and who take on a lease of the farm. A tenancy in favour of a partnership should be dis nguished from a tenancy in fa‐
vour of joint tenants. A lease which is granted in favour of John and Janet Smith as individuals is a joint tenancy. A lease granted in favour of John and Janet Smith as partners of and trustees for the firm of J&J Smith is a lease in favour of the partnership of J&J Smith with important consequenc‐
es which I will discuss in my ar cle. The advice which follows applies equally to tradi onal 1991 Act fully secure tenancies and fixed dura on tenancies under the 2003 Act. The important point to grasp is that a partnership is a sepa‐
rate legal person in Scots Law quite dis nct from the individ‐
ual partners who are partners of the firm. If John and Janet Smith enter into partnership under the firm name of J&J Smith, in the eyes of the law, J&J Smith is a separate legal person quite dis nct from John and Janet on their own as individuals. A lease in favour of the partnership is in favour of that dis nct legal person and isn’t held by John and Janet as joint tenants. Most partnership agreements provide that in the event of a partner coming out of the partnership by death or re ral the con nuing partners have an op on to acquire the outgoing partner’s interest and to pay that out over a period of me so that the partnership business can con nue. However, a partner leaving the partnership is an event which dissolves the partnership. In the eyes of the law, it is a new partner‐
ship which con nues if the remaining partners elect to con‐
nue the business and pay out the outgoing partner’s inter‐
est. Likewise, the introduc on of a new partner into an ex‐
is ng partnership is an event which dissolves the previous partnership and it is a new partnership which is created go‐
ing forwards. This has very important consequences in rela on to a part‐
nership which is the tenant under a lease. A number of court cases have established that where a lease has been granted in favour of a partnership and the partnership is dissolved the lease comes to an end regardless of whether or not the remaining partners have an op on to con nue the business. This is because the separate legal person which was the tenant no longer exists because the original partnership has been dissolved. There is one exemp on to this general rule. If the lease by clear and unambiguous wording is to the partnership as a con nuing “house” regardless of who the individual part‐
ners are, then the lease will survive the departure of a partner or the introduc on of a new partner. However, it is very unusual for leases to be worded in this way and such an argument is not possible where the lease is an un‐
wri en lease. Accordingly, readers should be aware that in respect of those agricultural leases where the tenant is a partnership rather than the individual members of the partnership as joint tenants, the death or re ral of an exis ng partner or the introduc on of a new partner are events which will dissolve the partnership as a consequence of which the lease will come to an end. If the landlord is aware of the change and allows the new business to con nue in occupa on and accepts rent from that new business then it is likely that a new tenancy will have been created by opera on of law simply by the land‐
lord allowing con nuing possession and accep ng rent. However, if it is a new partnership which is the tenant the same problem arises on the death or re ral of an exis ng partner or the introduc on of a new partner. Also, if a secure 1991 Act Tenancy in favour of a partnership comes to an end a er 28th November 2003 and the landlord per‐
mits a new partnership to remain in occupa on without any new lease being drawn up so that a lease by opera on of law comes into existence that lease will be a fixed dura‐
on tenancy under the 2003 Act and the old 1991 Act Ten‐
ancy will have disappeared. A further consequence is that compensa on claims for improvements and so on carried out by the old partnership may be lost if a new tenancy is created by opera on of law. Tenants who are concerned should not hesitate to seek advice on their posi on. In at least one case which I have dealt with a lease previously in favour of a partnership came to an end on the death of one of the partners which was an event which dissolved the partnership but the sur‐
viving partner con nued to farm in his own right and was allowed to remain in occupa on by the landlord who ac‐
cepted rent from him. These acts were sufficient to create a secure tenancy in his favour by opera on of law, all of this having taken place before the introduc on of the 2003 Act on the 28th November 2003. As I write this ar cle, we are anxiously awai ng the out‐
come of the appeal by the Sco sh Government in the case of Salvesen v Riddell, a case to do with the legi macy of Sec on 72 of the 2003 Act rela ng to limited partnerships. I will look at the consequences of the decision in my next ar cle. T : 01224 845945 E : hamish.lean@stronachs.com W : www.stronachs.com 34 Albyn Place Aberdeen AB10 1FW