What is a family constitution and why do we need one?

family show hands

If you have a family business, it may be useful to have a family constitution in place. These documents, also known as family charters or family protocols, provide a framework for engaging with family members involved in the business. They also take in related investment companies, the family office, and the trustees of family trusts.

A family constitution is a written statement that records the family’s heritage, culture, hopes and aspirations for future success, and plans how to achieve that success. The document enables the smooth running of family affairs and interests by containing a number of provisions for different events. 

What should be included?

To arrive at these provisions, a family will need to consider the following questions:

  • Where do we come from?
  • Where are we now?
  • Where do we want to go?
  • What are our guiding principles?
  • Should the business always be owned by the family?
  • Can the family release their interest in the business, and if so, on what terms?
  • What criteria should there be for employment of family members in the business?
  • How do we make decisions?
  • Who should lead?
  • Should that leadership rotate?
  • How often should we discuss succession?
  • Should there be a family council?
  • Should there be any associated provisions, and if so, what?

Planning ahead

Though a family constitution is not binding, it helps to avoid potentially catastrophic fall-outs by anticipating what should happen should a major family event occur. Having such a document means the family is not forced to take decisions in the heat of the moment, perhaps in very difficult circumstances, but has actively planned for different eventualities.

Involve everyone

When preparing this document, each family member has the opportunity to express their views on the questions above. Although not everyone may like the outcome of any particular decision, they will respect that they have been consulted, and have taken part in framing the constitution, and are less likely to protest if decisions are not in their favour.

Amanda Simmonds TEP, Senior Associate, Private Client, Lupton Fawcett, Leeds

‘One day, all this will be yours’: passing on the family farm

farmer and cows in countryside

It can be a very proud moment for a parent to look around a farm and to say to their child, ‘one day, all this will be yours’.

Family farms are often passed from one generation to the next and the value of land means that farms can have a considerable value, even if at the time cash is tight. Often two or three generations of the same family work together on the same farm.

But sometimes, unexpected things happen: parents get divorced and remarry, or family arguments drive a wedge between parent and child. In these circumstances, a parent may change their mind and make a new will, leaving property in different shares or, perhaps, leaving it to a new partner.

Can I change my will?

Anyone is generally free to change a will at any time. When making a will under English and Welsh law, a person is entitled to be capricious, whimsical or unfair if they wish to act in that way. Sometimes a new will is made just to reflect a change in circumstances.

An individual is perfectly free to make a promise to leave a property to someone – only to change their mind later. This situation is quite common.

So what’s different for family farms?

Family farms, however, face a unique situation when it comes to owners changing their minds. For example, a property-owning farmer may say to his daughter: ‘one day, all this will be yours’. He promises this on many occasions over a long period of time, and so the daughter continues to work on the family farm and turns down opportunities to work elsewhere (perhaps for a higher wage). This encourages her to stay working on the farm for a low salary precisely because one day the family farm will become hers.

If the farmer later decides to change his mind, this starts to stray into a more complicated legal situation.

If a property owner makes a promise to someone (for example to leave them the farm), and that person relies on that promise and acts to their detriment (for example by turning down the opportunity to work elsewhere for a higher wage), then the property owner can be held to that promise – even if they make a will to the contrary.

This legal principle is known by the slightly unusual word ‘estoppel’.

Sadly, there have been numerous recent cases that have gone all the way to trial in precisely these circumstances: a property-owning farmer has made a promise to leave the farm to a particular beneficiary, only to change their mind later. These are some of the saddest cases to come to court, since they reflect a tragic breakdown of family circumstances.

Try to resolve things amicably

If you find yourself in this situation and promises have been made and then broken, a good lawyer should take steps to try to resolve any family dispute amicably, without the worry, risk and expense of a trial.

Many people embark on a process of mediation in the hope that a family relationship can be salvaged and the work of the farm can continue. Statistically, mediations have a very high prospect of success: in the region of 85 per cent of cases referred to meditation settle, with considerable benefit for family members so that they can meet again around a kitchen table rather than at in court.

Don’t make promises you can’t keep

The best defence, however, is to avoid this sort of situation arising in the first place. It may be tempting as a short-term fix to offer to leave a farm to one beneficiary, rather than to someone else. Sometimes these promises are made on the spur of the moment or in the heat of an argument. These promises can, however, have serious consequences for the future of the farm. In short, promises should never be made unless they can be kept.

Stephen Lawson TEP is a Partner and Head of Litigation at FDR Law LLP, Frodsham, UK