Valuation of partnership assets

Background

A court has ruled as a preliminary issue that where a partnership deed is silent as to the basis of valuation for the purpose of determining the amounts payable to outgoing partners, such amounts have to reflect a fair value of the partnership’s assets and cannot be based on historical annual accounts which greatly underestimate the value of the partnership’s main asset which, in this case, was land.

Facts

The partnership deed provided that when a partner retired, died, became bankrupt or became a patient under the mental health legislation, his share in the assets of the partnership would accrue to the surviving partners in the same proportions as their respective shares in the partnership property, and the outgoing partner (or his personal representative) would be paid the amounts standing to his credit as his share in the capital of the partnership and as undrawn profits belonging to him in the “last annual general account prior to his retirement, death or bankruptcy or becoming a patient”.  However, no accounts had been agreed for any of the relevant years.

Decision

The court held that the outgoing partners were entitled to a “fair value” which was the market value of the land in question unless there was an agreement to the contrary, or there were other factors rendering such a value unfair. 

Comment

In the circumstances, the court decided in favour of the outgoing partners receiving a “fair value” but the case is nonetheless an important reminder that it is best to include clear valuation provisions in any partnership deed and ensure that proper and up-to-date accounts are kept so as to avoid the extra expense and stress of a court application at the time of determining an outgoing partner’s share.

Drake v Harvey & Ors [2010] EWHC 1446 (Ch)