Copyright 2010, Blake, Cassels & Graydon LLP

Originally published in Blakes Bulletin on Real Estate Joint Ventures, October 2010

Where two or more parties collectively own an asset, a regime is required to determine how decisions will be made. Usually decisions are separated into two groups: those that are "day-to-day" decisions and those that are more material – often characterized as "major decisions" – and which affect the substance of the project.

For joint ventures involving a development, it is usual for the important aspects of the development, such as budget, plans and scheduling, to be decided at the very outset of the relationship. Important aspects such as who the development manager and other lead professionals will be are also often decided at this early stage.

In respect of developments which are already in an advanced stage of construction, there may be no "major decisions" to be made in the early days of the joint venture. Nevertheless, it is important that there be a protocol in place defining the scope and substance of the major decisions and specifying the manner in which such decisions are to be determined. In the absence of such a protocol, the determination of such decisions might well prove to be difficult. For example, an opportunity to redevelop or substantially renovate a property may present itself and, depending on the longterm investment goals of the joint venture participants, such a decision may be difficult to reach. If an anchor tenant becomes insolvent or otherwise vacates its premises in a mall, a decision has to be made whether to attempt to re-let the premises to a tenant which operates a business similar to the insolvent anchor tenant and, thus, maintain the current use of such premises or, alternatively, to redevelop the premises for another, unrelated use. Although re-letting the premises would be a less expensive alternative in the short term, redeveloping the premises might prove to be more beneficial to the long-term financial viability of the mall – particularly in a situation in which a replacement anchor tenant for such premises may be difficult to find.

Typically, joint venture agreements specify that the joint venture participants will constitute a committee of individuals to make the major decisions on behalf of the joint venture participants. Committee members who are appointed by the joint venture participants act much like a board of directors of a corporation. Timely decision-making is important. Accordingly, most joint venture agreements prescribe the period of time for arriving at a decision. As well, many joint venture agreements stipulate that the decisions of the joint venture participants with respect to the major decisions must be unanimous. Accordingly, the consequences of a "deadlock" must be provided for.

Certain joint venture agreements specify which decisions are to be characterized as "major decisions" and which require unanimous approval of the joint venture participants, such as the sale of the property, the financing or the redevelopment of the property, and the approval of annual business and leasing plans. In respect of such major decisions, the joint venture participants are entitled to act in their sole and absolute discretion – in contrast to those matters which are not deemed to be major decisions, in respect of which they usually have an obligation to act reasonably and in the best interests of the development or project.

There are at least two exceptions to the rule that all joint venture participants may be entitled to participate in decision-making – default by a joint venture participant and conflicts of interest.

Loss of Decision-Making Rights Due to Default by Joint Venture Participant

If a joint venture participant is in default under the joint venture agreement and, after having received written notice of such default by the non-defaulting joint venture participant and been given an opportunity to cure, has failed to remedy the default, such joint venture participant will normally be excluded from voting on major decisions for as long as it continues to be in default. The obligation in respect of which a joint venture participant is most often likely to be in default is that relating to financial contributions to the project, as set out in the joint venture agreement or as otherwise has been previously agreed to by the joint venture participants.

Conflicts of Interest

It is not unusual for one of the joint venture participants to have an affiliate which acts as property manager or development manager of the project. In such circumstances, the approval of the joint venture participant which is affiliated with the manager should not be required in respect of a decision to enforce any rights against that manager.

Management Agreement

Generally, a manager is appointed to be responsible for the day-to-day management of the project, the reason being that it is not practical to require all of the joint venture participants to have input on each and every decision.

A property manager is usually engaged, with the scope and nature of the property manager's duties and obligations formally set out in a management agreement by and among the property manager and the joint venture participants. Frequently, the property manager is an affiliate of one of the joint venture participants. Typically, the management agreement gives the property manager the right to make certain "day-to-day decisions" without the approval of the joint venture participants, but will require the property manager to obtain such approval with respect to certain important matters, such as the approval of the annual budget, major leases and major renovations to the project. The management agreement will generally provide that the property manager will prepare a budget with respect to the forthcoming fiscal year of the joint venture (such budget to include all anticipated expenses and a leasing plan) for the approval of the joint venture participants and that the property manager may make decisions with respect to leasing and expenditures, provided that such decisions conform to the previously approved budget and leasing plan.

The property management agreement will stipulate the amount of fees to be paid to the property manager in respect of the management, leasing and development of the project.

Where the property manager is a third party unrelated to any of the joint venture participants, it is usual for the management agreement to be terminable on fairly short notice even without cause. Such a provision is designed to ensure that the property manager and the joint venture participants deal with each other in a commercially reasonable manner – requiring, on the one hand, that the property manager performs its duties and obligations to the satisfaction of the joint venture participants and, on the other, that the joint venture participants pay "market fees" for such management function. Such provision ensures that, if either the property manager or the joint venture participants are dissatisfied with the arrangement, either may simply terminate the management agreement upon written notice. Such is not the case if the property manager is an affiliate of one of the joint venture participants. In that event, the removal or termination of the property manager usually involves a default, an opportunity to cure, and (perhaps) arbitration.

The joint venture participant whose affiliate is the property manager will have an interest in ensuring that the property manager is not terminated in an arbitrary or inappropriate manner, especially where such management arrangement may be part of the original transaction and a central part of the "deal" pursuant to which the non-managing joint venture participant was permitted to become a joint venture participant.

The joint venture participants which are not affiliated with the property manager will wish to ensure that they have the right to deliver written notice of default to the property manager and force matters to arbitration, if necessary, and to deliver notice of termination to the property manager, if appropriate.

Generally speaking, management agreements with managers who are affiliated with one of the joint venture participants specify that the property manager may be removed as manager of the project at such time as it ceases to be an affiliate of a joint venture participant.

Dispute Resolution

As previously indicated, it is usual for a joint venture agreement to contain provisions contemplating circumstances in which a deadlock may arise between the joint venture participants, especially in those instances in which the joint venture participants have a similar financial interest in the project. Accordingly, if a major decision must be made and the joint venture participants are unable to agree, there must be a dispute resolution mechanism.

The only dispute resolution mechanism contemplated by many joint venture agreements is a "buy-sell shotgun" or a right to sell, subject to a right of first refusal. These provisions will be discussed more fully below.

Certain joint venture agreements contemplate, as an alternative, that the dispute be submitted to arbitration pursuant to the Arbitrations Act (Ontario) or determined by an industry expert. The use of an industry expert may be useful as most arbitrators do not have sufficient expertise to be able to render decisions which reflect industry norms. However, many joint venture participants are unwilling to be bound by a decision of a third party which is not a stakeholder in the project. In the case of disputes relating to relatively minor matters – such as the appraisal of the value of the project or the value of the interest of a joint venture participant therein – third-party expertise is of benefit. Accordingly, it is appropriate to include in a joint venture agreement provisions relating to appraisal procedures. Broad arbitration provisions, however, should be avoided.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.