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Prenuptial agreements as part of succession planning

Napthens - November 29th 2017

Official statistics show that 42% of all UK marriages are now ending in divorce.  These statistics affect farmers as much as the general population. However, for farmers, similar to other business owners, the financial and emotional fall-out following a divorce can be disastrous for the family, potentially leading to the break up or sale of the farm.

In all divorces, the starting point is equal division of the matrimonial assets and, in most divorces, the most valuable of all the assets will be the former matrimonial home and any family business.

The matrimonial home

In many farming families, the matrimonial home will be the farmhouse (as part of the farm) and this is likely to have been passed down through many generations of the family. There has been much debate as to the extent that inherited assets brought into the marriage should be considered upon divorce since the landmark farming case of White v White was decided in the House of Lords in 2000.  Inherited assets do not automatically fall into the `matrimonial pot’ for sharing but neither are they automatically excluded. The court considers all of the circumstances of the parties, including the length of the marriage and each party’s reasonable needs in deciding who should receive what. However,  the matrimonial home itself is a special category of assets and it is hard to argue that inherited farms should not be regarded as a matrimonial asset when the couple have lived in, and potentially brought up a family, in that farmhouse.

 The farming partnership

Many farms are run as partnerships, often with other family members, who will also be anxious as to the financial outcome of divorce proceedings. Farms are increasingly valuable assets.  A recent UK Agricultural Land Market Survey indicates that the combined value of GB's 39.8 million acres is £185.7 billion.  The total value of GB farmland and woodland has increased 149% over the past 10 years. This increase in land and property values means that, in many cases, farmers will have little option but to sell parcels of land or borrow money in order to finance a divorce settlement.

Prenuptual and postnuptial agreements

Given what is at stake, and given the attention that most farming families rightly give to active succession planning, serious consideration of prenuptial/postnuptial agreements should be part of that succession planning process.  These agreements set out in detail what will happen financially if the marriage ends and provide some security and reassurance for both spouses and for other family members involved in the farming business.

Although prenuptial and postnuptial agreements are not yet legally binding in the UK, they have become increasingly taken into account by the courts in England and Wales following the landmark Supreme Court judgement in the case of Radmacher v Granatino in 2010, where the judge took a prenuptial agreement into consideration when determining the financial settlement.

The court in that case handed down guidance as to the essential pre-requisites before entering into such agreements, including that the agreement is entered into freely and willingly by both parties and that it does not result in an unfair settlement for either spouse. Each party should obtain independent legal advice before signing the agreement, which should be finalised in good time, and certainly not on the eve of the wedding!  Observing these formalities will significantly increase the chances of the agreement being fully upheld by the court in any subsequent matrimonial financial proceedings.

It is true to say that most of us do not consider such agreements to be romantic, but, as a means of protecting a farming family’s livelihood, they are an essential aspect of family succession planning. It is a little known fact that spouses who have lived with each other before committing to marriage will have those years added to the length of the marriage.  Potentially, this can make a huge difference in terms of what is a fair settlement.  Farming families are becoming increasingly business savvy with some even including a clause in their partnership agreement providing that children joining the partnership enter into prenuptual (or even co-habitation agreements) before tying the knot or living together.

For further information on the above matter, please do not hesitate to contact me.