Real property — Partnership deed — Construction — Death of partner — Option to purchase deceased’s share — Whether valuation should be based on market value or historic cost
The claimants were the wife and children of a deceased partner (G) in a farming partnership. The defendants were the remaining partners and the brother of G. The partnership deed provided, inter alia, that: “if any partner shall die during the continuance of the partnership… the survivors shall have the option… to purchase the share of the deceased in the capital and assets of the business on the terms that the purchase price shall be the amount at which such share shall stand in the last balance sheet which shall have been prepared prior to the death of the deceased…”. The deed also provided that an account should be taken, and a balance sheet prepared, showing the assets and liabilities of the partnership, and the amount owing to each partner in respect of capital and profits.
In the years prior to G’s death, the value of the farm property had appeared on the partnership balance sheet at its historic cost value, rather than at its current market value. Following G’s death, the defendants sought to exercise their option to purchase his share of the business. They prepared a balance sheet that included partnership land valued at its historic cost. The claimants objected to that valuation, arguing that it should have been based on its market value, which was significantly higher than the historic cost. The claimants applied to the court for a ruling as to the correct valuation of the land.
Held: A correct valuation should be based upon market value.
1. For the purpose of exercising the option to purchase G’s share of the capital and the assets of the business under the partnership agreement, the farm was to be valued at its open market value if it were sold with vacant possession when the option was exercised. Each partnership deed had to be construed in its particular context. Before G’s death, the partners had not focused upon the significant difference between the historic cost and the market value of the property. The partnership assets had not been revalued on an annual basis, which reflected the inconvenience and expense of such an exercise.
2. Where a partnership deed required the preparation of a balance sheet showing the partnership assets and liabilities, with no further indication as to how the balance sheet was to be drawn up, the assets should be included at their value at the relevant time. G would have had the right to insist upon a market valuation while he was alive, and that right had passed to the claimants as his executors.
Elizabeth Jones QC and Hugh Norbury (instructed by Bird & Co, of Grantham) appeared for the claimants; Keith Rowley QC (instructed by Roythorne & Co, of Spalding) appeared for the defendants.
Eileen O’Grady, barrister
