For many investors pooling knowledge and capital with other like-minded individuals provides an ideal way of building a property portfolio. By far the simplest vehicle for setting up that business relationship is an informal partnership.
To establish an informal partnership two or more individuals need only carry on business together with a common view of making a profit. It is not necessary to formalise the arrangement by written agreement before it comes into existence. For that reason many investors fall into an informal partnership without realising or considering the consequences.
Once a partnership is created, partners are subject to the following statutory assumptions:
- all partners are to share equally in the capital and profits and contribute equally to losses;
- the partnership must indemnify any partner for payments and liabilities incurred in the ordinary and proper conduct of the partnership’s business;
- every partner may take part in the management of the partnership business;
- no partner is entitled to any remuneration for acting in the partnership business;
- no person may be introduced as a partner without the consent of all existing partners;
- any differences as to ordinary matters connected with the partnership business may be decided by majority vote but a change in the nature of the business requires unanimous consent;
- no majority of the partners can expel any partner unless a power has been conferred by express agreement, and
- where no fixed term has been agreed for the duration of a partnership, any partner may terminate the partnership by giving notice to the other partners.
No variation of these assumptions can be undertaken without the express agreement of each partner.
Whilst a new and exciting venture may serve to unite investors at the beginning of a partnership, these informal relationships become costly and problematic if previously good relations sour. It is an unfortunate reality that the investment of large sums of money, coupled with the stressful nature of property management creates an environment rife with legal conflict.
All too often investors will sensibly protect the hundreds of thousands spent on purchasing property, through property insurance, commissioning surveyors and instructing conveyancers, but fail to protect their investment by adopting the correct business structure.
For many the very nature of a partnership with its comparative simplicity and relative lack of regulation will remain the most suitable structure for investment. But leaving such a relationship on an informal basis is a recipe for disaster. To guard against the inherent dangers it is certainly advisable to have a formal partnership agreement drafted.
Such an agreement is an invaluable tool if you want to make provision for:
- differing profit shares, capital contributions and salary provision for individual partners;
- carving out and securing a capital contribution by designating it as a partner’s loan to the partnership;
- varying each partners capital entitlement on the dissolution of the partnership or sale of a property;
- limiting liability exposure for minor partners;
- specific provisions for retirement, expulsion and new investment;
- varying levels of decision making power for each partner;
- restrictions on competing with the partnership and the use of the partnership name by a departing investor;
- who will be recorded as holding title to existing and future property investments;
- dispute resolution to help avoid costly litigation in the event of a break down in relations.
At Anthony Gold Solicitors we specialise in Property Investment Partnership Agreements designed specifically to safeguard our clients’ investments. We have been fortunate enough to see their value when investments flourish and conversely the difficulties individuals face when they have no such protection in place.