In the world of business, family dynamics can play a significant role in shaping the success and longevity of a company. The breakdown of a relationship between co-directors and shareholders can cause significant issues for the business. We have blogged about the steps that can be taken to protect against the disruption caused by marital breakdown, but what are the implications for the couple themselves, and the family business when the couple involved were not married? Unlike married couples, cohabitation in England & Wales doesn’t bring with it the wide-reaching financial claims in case of separation and relationship breakdown.
In this article, we delve into the challenges faced by unmarried couples in a family business when their relationship breaks down and cover some options for those in a cohabiting and in a business relationship.
What claims do cohabitees have on relationship breakdown?
Unlike many other countries, including Scotland, the breakdown of a cohabiting relationship doesn’t automatically give rise to financial claims in England and Wales. A cohabitee has no right to claim, for themselves, maintenance, capital lump sums, a transfer of property (or company shares) or a share of their former partner’s pension; claims which automatically come into existence on divorce. If the couple has children, a cohabitee will be able to claim maintenance on behalf of that child (usually assessed by the Child Maintenance Service), as well as potentially provision for housing during the child or children’s minority and ancillary costs associated with raising a child (e.g. a car, repayment of debts, furnishing of any property, education costs etc). Otherwise, no personal claims arise under family law in England and Wales.
That is not to say that the financial implications of a cohabiting relationship breaking down are straightforward: far from it. Instead, a cohabitee may rely on a range of other areas of law to regulate and untangle the couple’s financial situation on relationship breakdown. Typically, disputes between cohabitees involve one party relying on property law principles to establish and/or realise an interest in the couples’ former home, or an investment property portfolio. However, much wider issues can and do come up in the context of a family business.
Cohabitees and the family business
My family law colleagues and I, often find ourselves liaising with our corporate, commercial litigation and employment law colleagues to resolve the complex, and interlinked, difficulties that can arise upon the breakdown of a cohabiting relationship involving a family business.
Common scenarios include:
- Businesses co-founded, and co-run, by cohabiting couples;
- A cohabitee being brought into their partner’s business, or partner’s family’s business, whether as a director, employee and/or shareholder;
- The cohabiting couple’s home being offered as collateral for business borrowing;
- Joint monies being invested in, or lent, to the family business;
- Inter company transactions between each cohabitee’s businesses.
The starting point will always be for family business owners to consider the situation carefully before involving a family member’s partner in the business. Whilst there may be other reasons (not least, tax benefits) behind, for example, giving an unmarried partner a shareholding in the business or employing them in some capacity, doing so will inter-mingle the business and the personal life. Simply put, if a cohabiting partner is kept entirely separate and apart from the family business, they are unlikely to be able to mount a claim against the value in that business in the event of a relationship breakdown, given the lack of stand alone claims for cohabitees in England and Wales.
However, it is appreciated that there will be some circumstances where the benefits of involving the cohabitee outweigh the risks, or where the business in question is very much a joint venture between the cohabitees. In those circumstances, it is vital not to fall into the ‘informality trap’. As with any business relationship, where parties in an intimate, personal relationship are also embarking on a business relationship together, the relevant documentation should be put in place from the outset. Whether that is an employment contract, shareholders’ agreement or loan agreement, the terms should be clear, agreed and in writing at the start, to set the tone for what then follows. Whilst having clear documentation is no guarantee against relationship breakdown and consequential difficulties for the business, it should mean the opportunity for legal argument as to construction or interpretation of any unwritten agreement is limited.
Aside from the necessary commercial / employment documents, the cohabitees themselves can enter into a Cohabitation Agreement. Cohabitation Agreements are used to set out both how the parties intend to regulate their finances during their cohabiting relationship (payment of bills, contributions towards mortgages, liability for debts, ownership of, and underlying interests in, property etc) and upon any future, hypothetical, relationship breakdown. Properly drafted, and with both parties having legal advice, a Cohabitation Agreement will bridge the overlap between the personal and business relationship, and work alongside the commercial documentation, avoiding costs, stress and emotional upset if the relationship does not work out.
Finally, if, a dispute arises between cohabitees in relation to a family business, an early referral to a specialist mediator with specific experience in relation to family businesses can help all interested parties work towards a constructive, cost effective and tax efficient solution, preserving the family business going forward.
Whilst cohabitation does not bring with it the far-reaching claims that married couples have on relationship breakdown, it would be naïve for any family business owner to assume that their business is necessarily ‘safe’ from the impact of relationship breakdown.
The safest course will always be to avoid the inter-mingling of the ‘personal’ and ‘business’ but where that is not possible, informality should be avoided. As with much in business, spending some time at the outset discussing, and most importantly, documenting the financial arrangements between cohabitees, and the basis upon which the cohabitee will become involved in the family business (if at all), is strongly recommended.
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