The exercise of an option in a partnership contract means there is no entitlement to interest under section 42 of the Partnership Act 1890.
The Court of Appeal has considered the operation of section 42 of the 1890 Act in Morton and another v Morton [2023] EWCA Civ 700.
The case concerned a family dispute about a farming partnership. A 2012 partnership agreement between Jennifer, her son Simon and his wife Alison (the appellants) could be dissolved by one partner on three months’ notice unless the remaining partners exercised an option to buy the outgoing partner’s interest within six months of receiving notice. The price was based on a re-valuation of the outgoing partner’s share at the date notice of termination was given and the purchase price could be paid in instalments with interest.
In February 2015, Jennifer dissolved the partnership by notice. Simon and Alison gave notice to acquire Jennifer’s interest but did not opt to pay in instalments. The contract for purchase was not completed by the deadline because they could not raise the funds and no re-valuation of the partnership assets had taken place.
Jennifer died in September 2016. Her daughter Julie, as her executrix, began proceedings to realise Jennifer’s share in the partnership. At trial in June 2021, Simon succeeded in establishing a proprietary estoppel on the basis of assurances given by his father Geoffrey that he would inherit the farming business, but that Simon and Julie would ultimately be entitled to the farmland. Simon had relied on those assurances by working on the farms for decades and Alison had also given up a career in banking to administer them. It was therefore unconscionable for Jennifer to go back on those assurances.
In order to reflect Geoffrey’s assurances, the judge adjusted the amounts credited to Simon and Jennifer in respect of the partnership assets, extended the option period for a further three months from determination of the sum payable and required the payment to be made in two instalments. In a second hearing Jennifer’s share was valued at just over £2M and the judge awarded Julie interest on the purchase price from 8 May 2015 under section 42 of the 1890 Act.
Simon and Alison appealed arguing that the varied option took the place of the original option and so interest was excluded under section 42 of the 1890 Act. The Court of Appeal agreed. The judge’s order varied the contractual rights between the parties to satisfy the equity arising out of proprietary estoppel. If an option in a partnership contract is exercised there is no entitlement to separate interest under section 42 of the 1890 Act.
Louise Clark is a property law consultant and mediator
