General practice legal expert Sofia Fadra explains why it is important for partners and practice managers to ensure that their practice’s partnership deed is up to date.
Frequently, changes in partnership occur that necessitate a review of the current terms of your partnership deed. Having an up to date partnership deed in place is important as it governs how the partners operate as a partnership. GP partnerships can exist without a partnership deed (these are known as ‘partnerships at will’), however these arrangements are highly unstable as they are governed by default statutory provisions.
When do partnerships need to update their deed?
If you have a valid and effective partnership deed in place, the retirement, death or the expulsion of a partner will not invalidate the deed. The terms of the deed will continue to bind the continuing partners and a well drafted deed should set out what happens in the event of retirement, death or expulsion. The continuing partners should, of course, document in a properly minuted partnership meeting the revised profit and ownership shares of the revised partnership. However, this would be an opportune time to review your deed and ensure that it correctly reflects the way the partners want to operate their business.
In respect of partnership changes, the trigger for updating your partnership deed is when a new partner is intending to join the partnership. If a new partner without being bound to the deed, a new partnership is formed and the old deed will be invalid. This remains the case even if the new partner is joining the partnership on a probationary period, as they will be considered a partner to the outside world.
What if we forget to update our partnership deed?
It is essential to have a valid deed in place for two reasons.
The first is to protect the stability of the business and to regularise the partnership by providing written evidence of agreement between the partners. The deed should fulfil this requirement and provide certainty and clarity for the partners and thus reduce the risk of a costly dispute arising.
The second reason is to ensure that the partnership is not operating as a ‘partnership at will’. A partnership can exist without a deed in place but it will then be regulated by default statutory provisions under the Partnership Act 1890 (‘the Act’). This is known as a ‘partnership at will’, which is an inherently unstable business arrangement (and especially for GPs).
Reliance on the Act to govern the partnership can leave partners vulnerable because the default provisions provide little security for a GP partnership operating in the complex NHS world.
A partnership at will can be dissolved at any time by any partner serving immediate notice, without the need to provide any justification in support of such notice.
This can not only create insecurity for the business as well an individual partner, it can also have serious adverse consequences by putting your NHS Contract at risk. This is because upon dissolution, the business has to be wound up so that all of the partnership assets are sold, the staff are made redundant (unless transferred to a replacement provider under TUPE) and the NHS Contract will automatically terminate. In a situation of conflict within the partnership, partners could find themselves ‘held to ransom’ by a disaffected partner.
What’s involved in the process?
A well-drafted partnership deed should address the key issues necessary to ensure the partnership operates smoothly.
It must include the nature of the partnership’s business and its name, how profits and losses are shared, the investments to be made as the capital of the partnership, decision making and the management of the partnership, leave provisions, resolution of partnership disputes, how property interests are held and transferred (if not documented elsewhere), restrictive covenants and what happens if a partner retires or dies and CQC obligations (to name a few).
How often should the deed be reviewed?
Notwithstanding the above, in the absence of any partnership changes, it is always a good idea to ‘health check’ your partnership deed every two to three years. The GP world is ever-changing and nuances that are specific to GP partnerships such as income streams, regulatory compliance and property ownership do require partners to ensure that their deed is kept up to date and correctly reflects the operation of their business.
If there have not been any partnership changes, and there are none intended for the foreseeable future, it is a good idea to identify one or two key trigger points during the year to remind partners to simply have a read through their deed. This could be the accounts date of the partnership, or the NHS financial year end (if different to the accounts date).
- A deed is crucial for all GP practices to provide stability and avoid the unwanted effect of being a partnership at will.
- A well drafted partnership deed will not only contain the necessary information to ensure your partnership operates smoothly but also, and perhaps more importantly, it can avoid an unplanned dissolution or the threat of your GP partnership being held to ransom by a disaffected partner.
Sofia Fadra is senior associate in the primary care team at Capsticks