Keeping your partnership deed up to date

General practice legal expert Puja Solanki explains why now is a good time for partners and practice managers to check their practice’s partnership deed is up to date.

The NHS Long Term Plan set out the vision for general practice in the next 10 years. The emphasis is on a move from secondary care to primary and community care.  It, and the GP Partnership Review, expects general practices to form close working relationships, and in particular, be a part of a primary care network.

However, before practices can form long-lasting, effective working relationships with other practices and healthcare professionals, they need to make sure that ‘their own houses are in order’, and indeed, the GP Partnership Review highlighted the importance of having a current, effective and valid partnership deed in place. It is thought that a majority of GP partnerships do not have a deed in place, or rather worryingly, believe that they have a deed but it is not actually valid, and they are therefore a ‘partnership at will’ governed by the Partnership Act 1890.  

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.  Rather the terms of the deed will simply continue to bind the continuing partners.  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.

The legal trigger for updating your partnership deed is when a new partner is intending to join the partnership. If a new partner joins the partnership without being bound into the deed, the addition of that new partner will make the deed 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 will be written evidence of the terms upon which the partners wish to operate their business. 

It will provide certainty and clarity to the partners.

The second reason is to ensure that the partnership is not operating as 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 render 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 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.

A recent example that we worked on involved Drs A, B and C who practiced in partnership together without a deed.  This meant that they were operating as a ‘partnership at will’.  Dr A (a disaffected partner) served notice of dissolution on Drs B and C as well as serving notice with immediate effect on NHS England to terminate the partnership’s GMS contract (both of which are possible under a partnership at will). Dr A then refused to rescind both notices unless his (rather unreasonable) demands for payment of his share in the property, capital and undrawn profits were met. This led to 12 months of stressful, expensive and time-consuming litigation to forge a deal with Dr A whilst trying to save the GMS contract. If a deed had been in place, then all this would have been avoided.

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, the sharing of profits and losses, 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, restrictive covenants, 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).  

Summary

A deed is crucial for all GP practices, not least to stabilise the partners’ working relationship by having a written document to evidence how their business should operate but also to avoid 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.

Puja Solanki is Associate Partner at Capsticks