Shall We Just Shake on It?

3rd August 2021

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by Tony Cheetham, Commercial Solicitor and Partner

Have you ever concluded a deal with a handshake? Perhaps you trusted that person and did not see the need to get a lawyer involved. This is admirable, but not creating a formal agreement describing the terms of the transaction could end up costing you a lot more in the future. Problems can arise if circumstances change or if one side does not fully understand the implications of the agreement.

Solicitors usually only encounter these agreements after things have not worked out in a way that one of the parties had expected. Below are some real examples (with the names changed) of when the ‘gentleman’s agreement’ has gone wrong and how these problems could have been avoided.

No tenancy agreement

Mary ran a shop from a small building John owned. There was no tenancy agreement, but John had verbally agreed with Mary to not increase the nominal rent she paid, and she had agreed to move out when asked. After John’s death, his family discovered that the building and surrounding land had development potential, but Mary had acquired a secure business tenancy, and did not remember her side of the bargain. The family had to pay significant compensation to Mary for her to leave the property. If John had arranged a written tenancy without security for the tenant, his family could have got the property back without compensation.

No loan agreement or shareholder agreement

Joe and Barry run a car business through their company. They have both loaned large amounts of money to the company, but without writing up the loan terms between them and the company, on the assumption that the loans will be repaid over a few years. However, if one of them dies, goes bankrupt, or leaves the business, the amount loaned could be demanded back immediately, which could cause the company to be wound up. A simple loan agreement, or better still a shareholders’ agreement, setting out the length of the loan and other terms would protect the company and the other owner.

When someone dies and there is no shareholder agreement

Peter and Charles were two friends who had built a valuable company from scratch. They had discussed creating a shareholder’s agreement but had never signed one. Charles assumed Peter would look after his long-term partner, Gaynor, after his death. When Charles died, Peter did not look after Gaynor’s interests at all and tried to get Charles’s shares with as small a payment as possible. We helped Gaynor obtain a proper settlement, but Charles could have saved her a lot of worry and expense if he’d entered into a shareholder’s agreement dealing with the valuation of the shares.

Another example was reported recently. Gilbert worked on his parents’ farm for very low wages for many years on the repeated promise that the farm and business would eventually be his. After his father’s death, relations broke down with his mother and sisters, so Gilbert had to sue to get what he had worked for. Fortunately for Gilbert, there was good evidence of the promises made to him, so the court found in his favour.  If Gilbert and his parents had put the original arrangement into writing, they would have avoided court proceedings and the inevitable expense.

All these cases show that relying on unwritten agreements can lead to problems. If the people involved had obtained proper legal advice, a lot of trouble and expense could have been avoided. As the saying goes, a gentleman’s agreement is worth the paper it is written on.  If you know you ought to have something in writing and haven’t yet done it, don’t put it off any longer, contact us at any of our offices.

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