A new partner cannot be admitted into a partnership without the consent of all the partners.

General partnerships are formed when two or more individuals carry on a business together with the intention of making a profit.  A general partnership is quite unlike a limited liability partnership and is very different to a company.

Partnership agreements

Much of the detail about how a partnership should be run, what its aims are and changes of partners will be contained in a partnership agreement.  Despite protections (under agency law) for third parties dealing with partnerships, most lenders will want to review the partnership agreement and a certified copy should be obtained early in the transaction. This can also help with the due diligence on who actually owns partnership assets if the bank wants to take security.

Who signs – contracts?

Unlike companies and LLPs, a general partnership does not have its own legal personality. This means it can’t enter into contracts in its own right but must do so by binding the individual partners.

If a bank (or any other third party) is dealing with a partnership, then, in theory, any single partner can bind the partnership as agent. This means that, in many circumstances, having only one partner sign the loan agreement will suffice provided it is quite clear who the borrower is. As against third parties, each partner is personally liable (jointly and severally with the others) for the debts of the business regardless of which partner incurred the liability.

That said, if the bank knows a particular partner does not have authority to act for the partnership on any given matter, it can’t rely on that person’s signature to bind the firm.

Many lenders therefore prefer to have every partner sign the loan documentation (or at least give written approval) to avoid any dispute and so that there is no doubt that all partners are on-board with the transaction.

Who signs – deeds?

When it comes to deeds, a single partner cannot generally bind the partnership unless the other partners have given him the express authority to do this. Often the other partners will give this authority by a power of attorney. To avoid any doubt, again, many lenders insist that any deed be signed by all the partners and, if this is not possible, for all partners to give their authority for those who are signing.

Lending to partnerships

In many ways, when dealing with partnerships lenders need to adopt a mindset that treats a partnership as a collection of individuals.  In particular, partnerships which have three partners or less have the protections of the Consumer Credit Act 1974 with all that that entails.  There are exemptions available (particularly the business purpose exemption where the amount of the facility exceeds £25,000) but the rules are detailed and the consequences of getting it wrong can be serious.  As a result, lenders need to take particular care when lending to small partnerships.

Owning assets – taking security

As a partnership doesn’t have its own legal personality, it can’t own any assets. The assets have to be held in the name of individual partners. In some firms, assets are owned by individual partners who allow the partnership to use them.  Most, however, have arrangements where some partners hold the assets in trust for all the other partners.

When you’re thinking of lending to a general partnership, you need to really consider what security is readily available if there is not sufficient value in land owned.

When taking security over land owned by an individual partner, a lender needs to consider whether or not the Mortgage Credit Directive might apply (beyond the scope of this post but see our previous post).

Changing partners

Partners have almost complete discretion over who can join the partnership, but the default position is that the consent of all partners is required before an additional partner joins.

Joining – New partners will not be liable to the bank for existing debt when they join. They will probably indemnify the other partners but some lenders will ask the new partner to give written confirmation that he or she agrees to be liable for the debt.

Retirement – If, during the life of the loan and security, a partner retires from the partnership then that retiring partner will usually remain liable for any debt, unless formally released.  A formal release is likely to be requested and all partners should be consulted on the terms of it. That said, sometimes finance documents are drafted in such a way as they provide for retirement of partners in advance.

Death – The partnership will automatically dissolve on the death of one of the partners unless the partnership agreement states otherwise. It is therefore important that the partnership agreement addresses this.

Any partnership assets that the retiring (or deceased) partner holds will have to be dealt with and, where necessary, another partner will have to be appointed as trustee of those assets.  If he owns them, the partnership must consider whether it needs to purchase the asset.

This is just a quick overview of some of the key issues to consider when lending to general partnerships. Other matters can arise on a transactional basis and depending on the type of person or entity the individual partners are and how the assets are held.

How be a new partner can be admitted into the partnership?

Can a partner be admitted into partnership with the consent of majority partners?

Does a partner has right not to allow admission of a new partner?

When can a person be admitted as a new partner?