Authors: Davinia Cutajar, Maria Gatt - WH Partners
When business partners co-own property, succession planning becomes a delicate balancing act. Consider four entrepreneurs-each holding a quarter share in a commercial property - perhaps the building from where the business operates - who wish to ensure business continuity while protecting their families' financial interests. The solution lies in two often-overlooked testamentary instruments: the legacy and the fideicommissum.
Maltese law offers elegant solutions for such arrangements. Under Article 683 of the Civil Code, testators may include both universal and singular title dispositions in their wills. More intriguingly, the fideicommissary substitution allows a testator to impose an obligation on heirs to transfer specific assets to designated beneficiaries - typically upon fulfilment of certain conditions. For business partners, this opens strategic possibilities.
The Legacy Route
The mechanics are straightforward. Each partner drafts a will instituting their spouse and children as universal heirs, while bequeathing their property share as a legacy to the surviving partners. The catch? The legatees must pay the heirs market value for the share. Ownership transfers directly to the partners; the family receives fair compensation. Everyone wins.
The Fideicommissum Alternative
The fideicommissary substitution offers a subtly different approach. Here, the testator's heirs temporarily inherit the property share but are legally bound to transfer it to surviving partners upon receiving payment. The distinction matters: heirs retain greater control, as the transfer occurs only when compensation is received. For families seeking additional security, this may prove the more attractive option.
Both routes lead to the same destination: business partners retain co-ownership; heirs receive fair financial compensation without becoming entangled in commercial property management.
Complementary Agreements: Belt and Braces
Testamentary provisions alone may not suffice. Partners should also execute a co-ownership agreement (where they hold the property directly) or a shareholder agreement (where a company owns the asset). Co-ownership creates an undivided community of property—partners jointly own the whole rather than separate portions. The agreement should mirror and reinforce the testamentary clauses.
A well-drafted co-ownership agreement includes a buy-out clause triggered upon death, granting surviving partners the right to purchase the deceased’s share at market value. Valuation methodology, payment terms, and timing should align precisely with the will's provisions.
Where a company holds the property, partners are shareholders. The shareholder agreement should establish clear rights for surviving shareholders to acquire the deceased's company shares, with payment flowing to the heirs.
One Final Consideration: Appointing An Executor
An executor - once confirmed by the Court of Voluntary Jurisdiction, can oversee the entire process: managing valuation, ensuring timely payment, and facilitating the share transfer. Independent oversight protects all parties and reduces the potential for family-business friction during an already difficult period.
Regardless of whether the partners opt for the legacy or fideicommissum option, there will be no infringement of the reserved portion, as the heirs will still receive the full market value of the deceased’s share in cash.
As already mentioned, the clauses in the respective partners’ wills should be identical, and should align with the terms of the co-ownership/shareholder agreement to avoid any disputes. By doing so, one ensures that the property remains with the surviving business partners and that the heirs are fairly compensated without becoming co-owners of the property.