Partners in a partnership would be well advised to keep comprehensive documentation at every stage in case disagreements arise in the future. In a recent case, whether or not a residential property was a partnership asset became the subject of extended court proceedings.
The partnership had traded successfully for some years. There was no written partnership agreement, but it was common ground that the two partners shared in capital and profits equally. After relations between the partners broke down, a consent order was obtained that made provision for the taking of accounts and the sale of the partnership assets. An issue arose as to whether the property was a partnership asset or whether it was held by one of the partners on trust for the other.
The second partner argued that he had made all the payments for the property and that the first partner was only on the title because he was able to borrow sufficient funds to purchase it. The second partner claimed that his beneficial ownership of the property was reflected in a deed of trust signed in 2021, whereby the first partner had agreed that, on the property's sale, the proceeds would be held by him on trust for the second partner.
The trial judge found that a trust had been created when the property was purchased, and that the document signed was sufficient to manifest and prove that trust under Section 53(1)(b) of the Law of Property Act 1925. He rejected the first partner's evidence that he had only handed over the document on a conditional basis, and that the purpose of the meeting at which it was handed over was to reach a settlement. The first partner appealed to the High Court.
The Court agreed that the facts surrounding the property's purchase pointed away from any trust having been created at that stage, and towards an intention to treat the property as a partnership asset. The first partner had advanced the funds and was liable for the mortgage, which was paid through the partnership account, and there was no documentary evidence supporting the second partner's assertion that he had made the payments for the property. The second partner's own evidence indicated that the status of the property was intimately linked with the division of the partnership's assets. While noting the limited circumstances in which an appeal court was entitled to set aside a trial judge's decision on the facts, the Court concluded that the document was not intended to have any legal effect in isolation from other documents discussed at the meeting which had not come to have legal effect.
The Court also found that the trial judge was wrong to conclude that the document was a manifestation and proof of any trust intended to have been created when the property was purchased, sufficient to satisfy the requirements of Section 53(1)(b). It was therefore unenforceable against the first partner. The appeal was upheld and the trial judge's decision set aside, with the consequence that the property fell to be treated as a partnership asset.