Don’t Neglect Your Partnership
First published in Association of Independent Specialist Medical Accountants (AISMA) Doctor Newsline in Spring 2020 issue
With the focus on primary care networks and integrated care systems in recent months, attention might have shifted from housekeeping around medical partnerships.
The majority of GP practices are run as partnerships, and this is likely to continue for the foreseeable future. A partnership is a popular and flexible business model, but there are many pitfalls, particularly if you don’t have a robust partnership agreement in place. In this article, Alison Oliver (a partner at Hempsons) reminds us of the importance of keeping your partnership agreements up to date.
The nature of partnership
A partnership is formed when two or more persons trade together with a view to making profit. You do not have to actually make a profit, but the intention to do so is the main rationale for the relationship. This distinguishes partnerships from other types of unincorporated organisations, such as clubs and societies, which are not trading businesses.
Unlike an incorporated structure (such as a company), which has its own distinct legal identity from its members, a partnership does not have its own separate legal personality. This means that a partnership cannot employ staff or own assets in its own right. It is the individual partners who enter contracts, own partnership property and bear the liabilities of the partnership.
In the absence of an agreement between the partners, a partnership is subject to the provisions of the Partnership Act 1890. These terms are unlikely to suit the partners in a modern-day medical partnership. In particular, the Partnership Act allows any partner to dissolve the partnership on notice to the other partners. This could have catastrophic consequences for the practice’s NHS contract, as an acrimonious partnership dissolution will result in the contract being terminated unless the outgoing partner is prepared to nominate that the contract continues with the other partners.
It is therefore imperative that you have an agreement in place setting out the terms of the partnership and preventing dissolution at the whim of an individual partner. The agreement should be reviewed on a regular basis to ensure it continues to be relevant to the practice’s needs.
As the partnership itself cannot own assets, partnership property will be owned by some or all of the partners on behalf of the partnership.
Partnership property should be recorded in the partnership accounts, noting the respective interests of the partners in the property. However, the fact that property is included in the accounts is not necessarily definitive. There have been occasions when the courts have not accepted the evidence of the accounts.
To avoid disputes over ownership arising, your partnership agreement should state which items belong to the partnership as well as the respective interests of partners in partnership property. This is particularly important for property of high value, such as partnership premises. Your agreement should include provisions governing what happens to the partnership property if a partner dies or retires – will the continuing partners automatically acquire the outgoing partner’s interest, or is this subject to the exercise of an option? How will property be valued? These matters are a common cause of dispute and a good agreement will minimise the risk of disputes arising. It is often appropriate for the premises arrangements to be set out in a separate deed of trust.
Hempsons’ David Naughten’s article ‘GP refinancing: the value of preparation’ in the Winter 2019/2020 issue of AISMA Newsline, considers issues around partnership premises in more detail.
Profits and losses
Subject to agreement to the contrary, partners are entitled to share equally in the partnership profits and bear equal liability for partnership losses. In general practice, this is rarely what the partners intend, with profit shares and liability for losses usually being shared according to workload. It is important that the principles governing how profits and losses are to be shared are set out in your agreement as well as the actual profit shares at the date of the agreement. Mechanisms for varying profit shares should also be agreed.
Your partnership agreement should define the obligations and duties of the partners. Certain duties are implied between partners – most notably a duty of good faith – but there will be numerous other obligations with which GP partners must comply to ensure the success of the practice. For example, GP partners should be expressly required to maintain their professional qualifications and registration, fulfil their required sessions and comply with the practice’s contractual obligations. The obligation of partners to contribute to partnership capital should also be clear – is this obligation shared equally or in the same proportions as profit shares, for example?
The consequences of serious or persistent breach of obligation should be set out in the agreement. Ultimately, the partnership should be able to expel a partner who seriously or persistently breaches their obligations. Without an express provision in the partnership agreement, you will not be able to expel a partner whose conduct or performance is putting the practice at risk.
Your partnership agreement should set out the holiday and study leave entitlements of partners as well as entitlements to leave for maternity, paternity, adoption, sickness, sabbatical and compassionate grounds. Your agreement should make clear whether a partner is entitled to their usual profit share and drawings during periods of leave for different purposes, how locum costs will be funded, and any applicable procedures, such as how competing requests for leave will be dealt with. As partners are not employees, employees’ statutory employee leave entitlements do not apply so it is important to consider and define these entitlements in the partnership agreement.
Risk and liability
Partners are all agents of the partnership with authority to bind the partnership in relations with third parties. The partners are jointly and severally liable for the acts and omissions of any partner in the ordinary course of business. A third party could therefore sue partner A for loss caused by an act or omission of partner B.
You should set out in your partnership agreement the extent of the authority of individual partners to bind the firm. Where individual partners act outside that authority, it would be usual to provide in the agreement that they will indemnify the others against losses caused by those acts. It is also usual to provide that individual partners indemnify the others against losses caused by their own clinical negligence and/or breach of the partnership agreement.
It is not unusual for partners to have roles outside the practice and these are a common cause of disagreement and dispute between partners. Sometimes these roles are undertaken on behalf of the practice (for example, practice representation on the CCG or primary care network). Other roles might be related to the work of the practice, but not necessarily undertaken on behalf of the practice (such as the primary care network clinical director role or private medical work). Yet other roles could be unrelated to the practice, such as a media role. Even roles undertaken outside a partner’s usual hours in the practice and which are not directly related to the work of the practice have the potential to impact on the practice.
It is important that your agreement makes clear what partners are and are not permitted to do both inside and outside their usual hours of work. There should be a mechanism for partners to agree what time partners are permitted to devote to external roles within their usual practice hours (if any), whether income from those roles can be retained by the individual partner or is to be treated as partnership earnings, and whether the other partners can require a partner to give up an external role if it is having a negative impact on the practice.
It is essential that if you admit a new partner – even for a probationary period – that they sign a deed of adherence to the partnership agreement. When a new partner joins, a new partnership is formed and the existing partnership agreement will not bind the new partner unless they agree to be bound by it. The deed of adherence should include any variations to the terms of the agreement relating to the new partner (such as their capital contribution) or arising from their joining (such as changes in session allocations and profit shares of the partners). When offering a new partner the position, your offer should make clear that it is subject to them agreeing to be bound by the partnership agreement.
Your agreement should include provisions relating to voluntary retirement from the practice, including the notice period that partners need to serve, as well as grounds and procedures for expulsion or compulsory retirement of partners.
You should consider including a “last man (or men) standing” clause so that if the resignation or expulsion of a partner would result in there being less than a specified number of partners, those continuing partners either opt to continue the practice or to dissolve the partnership, with the outgoing partner sharing the burden of winding up costs and liabilities.
Changes in the practice and new developments
We recommend that you review and update your agreement from time to time to ensure it is still fit for purpose in the light of new developments in general practice or changes within the practice. You should consider whether your agreement needs to be updated to reflect the practice’s membership of a primary care network – for example, is the extent of authority of your practice’s PCN representative clear? Is your practice a nominated payee for your PCN or is one of your partners the PCN clinical director? Changes to the agreement might be needed to deal with these matters.
We would always recommend that your agreement is reviewed if you acquire new premises, develop existing premises, take on a new mortgage or undertake any other major change in the practice, such as leasing part of your premises to a third party.
Other partnership terms
A detailed account of all the terms that a partnership agreement should contain is not possible in this article. There are numerous other provisions that we would recommend are considered, such as a right to suspend a partner from their duties or to insist on a medical examination or fitness to practice assessment in certain circumstances.
The absence of a partnership agreement – or an agreement that is insufficiently clear or out of date – leads to a lack of clarity about the rights and obligations of partners which in turn often results in disputes about entitlements and duties. The absence of a partnership agreement also means that there are no clear mechanisms for dealing with disputes when they arise.
The best way to avoid a dispute arising or escalating out of control is to have in place a comprehensive, up-to-date written agreement which sets out the rights and obligations of partners, addresses the main causes of partnership disputes and includes mechanisms for resolving problems.