Updated: Jul 29, 2020
Who should read this article?
Are you considering entering into a joint venture (“JV”) in the property sector? Are you unsure of where to start or how to make the most of the opportunity ahead of you? This article will be particularly helpful for;
· Financial Investors
· Property Developers
· Construction Builders
· Property Investors
Why enter into a Property Joint Venture?
Put simply, a Joint Venture is when two or more individuals or businesses agree to come together to achieve a project. Any agreement made is legally binding and projects can be as small as a residential build or as large as a major commercial development with multiple units.
In business, two heads can be better than one. By combining expertise, resources and finances, shared aims can be achieved more quickly and efficiently. Importantly, having a robust structure and legal agreement in place ensures there is mitigation of any risks to the individual parties involved.
When is a good time to commence your Joint Venture?
Joint Ventures are popular, especially as the property sector is slowly beginning to move again post COVID-19. Whilst the Coronavirus pandemic saw unexpected challenges arise for those in the property sector, now could be an opportune time to connect with like-minded associates to achieve your common objectives. With the recent stimulus packages announced by the UK government regarding changes to planning, construction building and Stamp Duty holiday in the July 2020 Mini Budget, there is scope for incentive to drive the sector forward out of the current economic crisis.
The benefits of a Joint Venture might include sharing risk, raise funding, sharing business connections and utilising specialist resources, depending on the nature of the Joint Venture agreement in place.
Below we have provided five top tips to guide you on your road to a successful venture, including:
1. Find the right JV partner
2. Decide what kind of JV agreement you should have
3. The types of structure for your JV
4. Take account of insolvency or bankruptcy
1. Find the right partner
The first question to ask before finding the partner is whether a Joint Venture Partner is needed and how will it support the strategic and financial objectives of the project.
Having the right partner can help to create a successful project. Generally each partner will bring something to the table, be it skills, time, money or experience. Due diligence should always be undertaken to ensure the partner is the right fit for the purpose for the project.
When assessing the suitability of a JV partner there are many factors to consider, below is a list of questions you should consider when entering into a partnership, the list is not exhaustive;
· How well do they perform?
· What is their attitude to collaboration, and do they share the same level of commitment?
· Do you share the same business objectives?
· Can you trust them?
· What kind of reputation do they have?
· Are they financially secure?
· Do they own assets they will be putting into the joint venture?
· Do they already have joint venture partnerships with other businesses?
In a recent ruling in the High Court Russell v Cartwright  EWHC 41, the judgement looked into what a court will take into account for the parties in a property Joint Venture. The judgement concluded there was no general obligation to act in good faith, either express or implied.
The case involved a Joint Venture between four individuals, with the aim to develop properties in the Greater London region. Relationships turned sour and a claim was brought forward by one of the JV partners. In this case, the judgement was interesting as the Judge found that individuals did not owe each other fiduciary duties. The Judge distinguished the relationship between the parties as shareholders; they were not in a partnership.
Further analysis of the case is reviewed in my article here. The case highlights the need to have clarity in the agreement of the parties intentions and the importance of ensuring the agreement is robust to ensure issues tested in case law are taken into consideration.
2. Decide what kind of JV agreement you should have?
Property Joint Ventures can be variable dependent on the requirements and aims of the project. There are, however, two main categories that joint ventures fall under: Profit share and fixed interest. It is important to understand the difference between the two types of partnerships and advice should be sought to discuss your legal requirements. Contact a member of our commercial law team today by clicking here to discuss your requirements.
Profit Share Joint Ventures
In a profit share joint venture, a project is completed and a profit made, before the profit is split into pre-agreed shares.
Ms. Brickman finds a property in need of renovation and manages the full restoration project. Mr. Banks finances the project but isn’t involved in the day to day management. They agree in advance that the profit share will be 50/50.
The property is purchased for £70,000 and the refurbishments cost £30,000, making the total cost (inclusive of fees and taxes) £100,000. The property is then sold for £150,000, resulting in a £50,000 profit. Split between Ms. Brickman and Mr. Banks, based on the 50/50 split agreed, each party will receive £25,000 in profit.
Fixed Interest Joint Ventures
In a fixed interest joint venture, parties agree in advance a fixed rate of interest instead of the percentage split agreed upon in a profit share.
Mr. Joiner finds a property in need of renovation and manages the full restoration project. His Joint Venture Partner, Mr. Carpenter, finances the full project. Mr. Joiner promises to give Mr. Carpenter a 10% annual rate of interest on his money.
Therefore, if the property was purchased for £70,000 and the refurbishments cost £30,000, inclusive of fees and taxes, the total cost of the project is £100,000. When the property is sold for £150,000 after one year, Mr. Carpenter receives £10,000 in interest, whilst Mr. Joiner receives the remaining profit – in this case £40,000 (£50,000 profit minus the interest paid to Mr. Carpenter).
There are advantages and disadvantages to each type of joint venture and you should explore potential outcomes in detail. Contact a member of our commercial legal team to discuss your legal requirements by clicking here.
3. The types of structure for your Joint Venture
Once you have found the right JV partner and have agreed upon what type of agreement your joint venture will be, the structure must be decided upon.
The legal structures available for a Joint Venture partnership under English law are;
· Limited Liability Partnership
· Limited Company
· Partnership Agreement
The right legal structure for your Joint Venture project should be considered carefully to ascertain whether it is appropriate for your project. Contact a member of our commercial legal team by clicking here to discuss your requirements today.
Other issues that should be considered are;
· Delegation of administrative duties
· Raising finance and budgeting
· The construction and planning of the project
· Managing contractors
· Exit strategy
Deciding these areas of responsibility in advance will avoid any potential pitfalls that could lead to dispute, in particular where there is lack of clear understanding or agreement on how to manage and exit the project. A robust legal agreement would assist in avoiding uncertainty and provide a process in the event of a dispute, which can be costly and time consuming.
4. Take account of insolvency or bankruptcy
Joint Ventures may, at some point during the life cycle, face the issue of insolvency. This can be due to external economic conditions; change of focus or internal management of the project. The recent COVID-19 pandemic and governmental measures have contributed to increased fallout amongst Joint Venture partners with the failure to achieve business plans and an increase in business insolvencies.
There are two risk scenarios, firstly if the Joint Venture files for insolvency or secondly, one or more of the JV partners files for bankruptcy. Usually if failure is inevitable, the members of the JV might fund the winding down of the Joint Venture outside of insolvency, however before such action takes place, it is important to determine whether a JV actually exists and the terms of any agreement.
A carefully drafted Joint Venture agreement/shareholder agreement should contain default provisions in the event of an event which could trigger the breach in the event of one of the parties facing financial difficulty and or insolvency.
The UK government recently announced the suspension of wrongful trading rules and the slow down by the courts to halt winding up petitions and administration orders during COVID-19. The impact of the changes with the recent Corporate Insolvency and Governance Act 2020, which received royal assent on 26th June 2020, is the largest change to the UK’s corporate insolvency laws in more than 20 years and should be considered either with drafting or in dispute of a Joint Venture agreement.
Joint venture partners should be considering the following risks;
· How to protect the Joint Venture assets, where one of the JV partners is in or susceptible to default;
· How to mitigate exposure to the operations of the JV that may lead to default;
· What to do in the event of failure due to the Coronavirus in the future (anticipated risks);
· How to discontinue a relationship or terminate the JV partnership effectively.
Concerned about your Joint Venture exposure and risks? Are you worried that someone else in the JV is susceptible to default? Contact a member of our commercial legal team by clicking here to discuss your requirements.
When parties enter into a Joint Venture agreement, confidential information is often disclosed during the due diligence period. It is common to enter into a non-disclosure agreement (NDA) prior to disclosure of any confidential information. This will ensure any information disclosed, such as asset or financial information, will be protected information and the terms of the agreement will provide adequate steps to protect the information.
A further confidentiality clause can be added to the Joint Venture agreement to set out the terms of any information disclosed during the project and how such information will be held upon completion or termination of the project.
If there is no sufficient confidentiality clause within the agreement, then in the event of a dispute the court would decide whether the information is entitled to legal protection. Such a decision may have a detrimental effect on the partner becoming a competitor or using the data disclosed for potential gain away from the partnership without restriction.
Bonus top tip!
No matter how diligently you have chosen your Joint Venture partner, or how detailed your responsibility structure is, disputes can occur. Should you not have a dispute resolution provision included in your property Joint Venture agreement, this may result in the disagreement impacting upon the operation of your project, your profits or your commercial relationship. It is for this reason that we recommend including a robust dispute resolution clause setting out a clear procedure, jurisdiction, language and governing law in the event of dispute.
Read more about how alternative dispute resolution can benefit your business here.
COVID-19 has brought difficult and challenging times for businesses both in the UK and worldwide. Whilst some businesses were forced to adapt quickly in order to remain operational throughout the national lockdown, others faced multiple months with little to no turnover. As a result, business owners in the property sector have important decisions to make as we commence into the new normal.
A property Joint Venture planned and executed well is the perfect opportunity for parties to partner together to be successful in their common objectives. By sharing resources, funding and knowledge, those entering into property Joint Venture agreements are safeguarding the success of their project, however without careful consideration of the risks involved and how to mitigate them, and without clarity in the agreement terms, disputes can quickly occur in particular during economic downturns.
Why choose Serenity Law LLP?
Who are we?
At Serenity Law LLP, we have a team of experts in commercial law. Our co-founding partners work together to provide a complete, end-to-end legal service for clients entering into property joint venture agreements.
Avinder Laroya is an experienced commercial lawyer with a passion for dispute resolution. Not only can Ms. Laroya guide you through the initial steps of the joint venture process, developing watertight agreements in line with your requirements, but should any disagreements threaten the success of your venture, she will work diligently to reach settlement using alternative dispute resolution procedures. By encouraging open and honest communication, Ms. Laroya works alongside her clients and their partners to ensure the best possible outcome for the venture is achieved.
Stanley Beckett is a knowledgeable transactional lawyer, with over 30 years in real estate and property litigation. He is experienced in a wide range of property development types from high end residential to all commercial sectors including offices, industrial, retail and mixed-use developments and he’s even lectured in commercial lease issues, too.
To find out more about how we can support your commercial property joint venture or to take advantage of our free consultation offering, contact the team today on 0800 019 7773 or click here.