How is the business set up?
Farming businesses can be set up in a variety of different ways, from sole trader, to partnership, to limited company, or a mix of the above for different aspects of the business. Perhaps the most common farming business vehicle is a partnership and it is important to understand how this functions as it can have a significant impact to how the finances are resolved on separation. Common difficulties that arise are:
- The absence of a written partnership agreement, in which case the provisions of the Partnership Act 1890 (a very old statute!) will apply. These may or may not suit the particular circumstances of the couple.
- Lack of clarity about whether all or part of the farm land is owned as an asset of the partnership, or whether the partnership merely operates on land owned by someone else (including one or more of the partners as individuals).
- Uncertainty about when, and how, the farming partner obtained their interest in the partnership. The timing of this, and whether it was a gift, inheritance or transfer for value, will affect whether or not it is "matrimonial property".
- Introduction of the spouse into the partnership. Usually, this means that on separation, there needs to be a formal agreement about how this spouse will come out of that business structure, as well as a formal agreement about dealing with the rest of the matrimonial finances.
- The continuing involvement of the previous generation or introduction of the younger generation into the partnership. This can add another potential layer of conflict in an already difficult situation.
What is and isn't up for sharing?
Farms are often passed down through generations within a family. From the point of view of divorce, if this transfer occurred pre-marriage, or if the interest in the farm was gifted or inherited, the farm will not form part of the matrimonial 'pot' upon divorce - unless subsequent actions change that.
For instance, a "non-matrimonial" asset (e.g. received pre-marriage, gifted or inherited) would become "matrimonial" if the land or asset was sold and the proceeds were then used during the period of the marriage to purchase another farm. The change in form from the fixed asset (farm), to a liquid asset (money), and then back to a fixed asset (farm) would convert this from non-matrimonial to matrimonial property.
Restructuring can also convert the form of previously non-matrimonial assets or land into matrimonial (and included in the matrimonial 'pot') - and that is where changes to a business structure, or replacing an old partnership with a new one, can take on real significance when considering matters on separation.
Are there arguments for unequal sharing?
Once the matrimonial assets have been established, we need to consider how these should be shared. Scots law provides that the net matrimonial property ought to be shared fairly between the parties on divorce. Generally "fairly" means equally unless there are other relevant arguments to take into account which may alter the split in one party's favour.
However, if it is the case that a "non-matrimonial" asset has converted to "matrimonial", in the way set out above, then the spouse from whom that asset originated will likely have an argument that the value should not be shared equally. This is often referred to as a "source of funds" argument. For example, if one spouse inherited land from her parents, but decided during the marriage to sell that land in order to buy a different plot, then she could argue that part or all of the value of that new land should not be shared equally with her spouse, or should be left out of account altogether, because the source of those funds were all non-matrimonial.
This can become a more difficult argument to make if the contribution from non-matrimonial funds was small, or made a long time ago, or became very intermingled with matrimonial money, but it remains an argument that often finds favour with the court (and in negotiations).
Are there arguments for disadvantage?
The law can compensate spouses if they have been economically disadvantages before or during the marriage in terms of capital, income and earning capacity. The disadvantage must have been in the interest of the marriage or family. Spouses will often try to make this case if they have, for example, given up a job to look after the children of the marriage. Importantly, this claim can be met using non-matrimonial property when the amount of matrimonial property is insufficient.
This is again something which can often become a very difficult issue in farming cases, particularly where much of the farm assets are non-matrimonial due to inheritance or gift, but where the non-owner spouse has contributed to the farm or family. In such a case, the non-owner spouse may try to make an economic disadvantage claim, in order to get some kind of share of the farm assets, rather than being left with very little at the end of the marriage.
Where will the money come from?
Once parties have identified what the matrimonial property is and have considered any other relevant legal arguments in relation to its division, the focus then turns to financing the settlement. Scots law sets out that division of assets has to be fair having regard to the parties' resources - although this does not necessarily mean liquid resources. It is not uncommon for a farming client to be asset rich but cash poor. This often means that a farmer client needs to consider borrowing and/or selling assets in order to pay out their spouse, and a court would expect a farmer client to thoroughly investigate all options in terms of financing a settlement. As such the financial settlement will undoubtedly have an impact on the farmer client's present and future resources so getting the settlement right is important to ensure the longevity of the farming business.
How will the next generation be affected?
Again, a very important consideration for farming families can be how and if the next generation will take things forward in the business. Whilst not a consideration that the court will have, if all parties are agreed that this is important, it can be something to be carefully factored into consideration of priorities and settlement discussions.
In short, divorces involving farms are often complex, with numerous interlinked legal and personal issues. These complexities merit specialist advice. We have a full team of experts that regularly advise the farming community and are ready to provide you with specialist legal advice and protection on the complexities of (potential) divorce action.
Should you wish to speak to us about farming divorce, please contact Lucia Clark.
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