• Stanley Beckett

5 Top Tips for Successful Property Joint Ventures

Updated: Feb 8, 2021

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

5. Confidentiality

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 [2020] 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.

For example:

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.

For example:

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