ARTICLE
23 September 2024

Property Joint Ventures – Key Considerations (Guide)

RF
Ronald Fletcher Baker

Contributor

For over 75 years, Ronald Fletcher Baker LLP has been providing expert legal advice from its offices in London, Manchester, and Exeter. The firm has considerable experience in acting for medium to large national and international companies, governments, financial institutions, high net worth individuals, families, and corporate investors, many of whom are based overseas.

A Property Joint Venture is a collaborative arrangement for acquiring, developing, or managing property, sharing risks, resources, and expertise. Key considerations include legal structure, decision-making authority, funding, ownership shares, and potential conflict resolution.
United Kingdom Real Estate and Construction

What are Property Joint Ventures?

A Property Joint Venture is a business arrangement where two or more parties agree to collaborate for the purpose of creating value, typically through the acquisition, development, and/or management of a property.

Joint ventures are a popular method of sharing risk and pooling knowledge and expertise, enabling investors to access properties that might otherwise be unattainable or unsuitable for a single party.

How are Property Joint Ventures Usually Structured?

Property Joint Ventures can be structured in several ways depending on the agreement between the involved parties:

Special Purpose Vehicles (SPVs):

An SPV is a separate legal entity created for a limited purpose. They are usually used because they are free from any pre-existing obligations and debts and are separate from the parties that set them up.

Limited Liability Partnerships (LLPs):

An LLP is a partnership where some or all partners have limited liabilities.

Traditional Partnerships:

In a traditional partnership, all partners share the profits and losses, and each partner is personally liable for the business's debts.

Contractual Agreements:

Sometimes, a property joint venture may simply be structured through a contractual agreement outlining each party's responsibilities and expectations.

Benefits of Property Joint Ventures

Mitigating and Spreading Risk:

Property joint ventures often mean the risk associated with investment is shared between the JV parties, so the JV parties potentially reduce their losses in comparison to a situation where the project does not go to plan and they are the sole property investor.

Increased Financial Resources:

Pooling financial resources with other investors enables the acquisition of properties that might otherwise be unaffordable.

Diverse Skill Sets and Expertise:

Combining expertise and resources allows joint venture parties to undertake larger and more complex projects than individual investors could manage alone.

Potential Increased Return on Investment (ROI):

Property joint ventures can yield greater financial returns by enabling investment in larger and more expensive development opportunities.

Risks of Property Joint Ventures

The relationship between joint venture partners can deteriorate into conflict. Below are some common causes of disputes:

Deadlock

A common issue in 50:50 joint ventures is deadlock, where parties cannot resolve conflicts. In such cases, neither party has a majority, which often leads to paralysis in business operations.

In a 50:50 joint venture, the parties ought to consider whether the joint venture agreement should contain specific provisions to resolve such situations. If the company's articles of association do not provide guidance, seeking court remedies may be necessary, though this can be costly and time-consuming, potentially leading to the breakup of the joint venture.

Ronald Fletcher Baker LLP have acted on behalf of parties in several joint ventures where the relationship between the JV partners has deteriorated to such an extent that it has been necessary to apply to court for a winding up order on the just and equitable grounds.

The case of Re Yenidje Tobacco Co Ltd [1916] 2 Ch 426, CA illustrates this issue. Two equal shareholders and directors could not agree on managing the company. There was no provision for breaking the deadlock and the Court of Appeal held that there had been a total breakdown of relations between the two equal partners and that it was just and equitable to wind up the company.

Disputes About the Terms of the Property Joint Venture

Another common cause of disputes in property joint ventures relates to issues around the original terms of the joint venture agreement.

Ronald Fletcher Baker LLP have acted on behalf of parties in several joint ventures where the parties did not have a written joint venture or shareholder agreement at the outset of the joint venture and a dispute has subsequently arisen about fundamental issues such as entitlement to profit, responsibility for certain aspects of the joint venture, decision-making authority and exit options.

If the parties to the joint venture are able to prepare comprehensive agreements at the outset, then this will assist in minimising the risk of disputes about the terms down the line and it should also help in resolving any disputes which do arise.

In the event of a dispute about the terms of the joint venture, unless an agreement can be reached between the parties regarding the terms then it may be necessary to apply to court for determination of the JV terms.

Inadequate Performance by a Joint Venture Partner

Where one joint venture partner has responsibility for funding the project, or for the management of a development or refurbishment, disputes often arise where that party fails to perform their services adequately.

Ronald Fletcher Baker LLP have acted in joint venture disputes where one party has not had the competence and experience to carry out their responsibilities in accordance with the joint venture agreement. In some situations, the complexity and scale of the redevelopment may be too difficult for a JV party to handle.

For example, in the event that a redevelopment is not managed in accordance with all planning, statutory and regulatory requirements then this could expose the joint venture parties to a risk that remedial works are necessary which would cause additional unplanned expense, delay the project and cause issues with any lenders who have provided finance on the project.

Acts of Bad Faith by a Joint Venture Partner

Unfortunately, instances of bad faith or fraud can occur in joint ventures.

Ronald Fletcher Baker LLP have acted in joint venture disputes where it is alleged that one of the JV parties deliberately siphoned out of the JV company / deliberately inflated refurbishment costs. We have successfully obtained high court injunctions on the part of the aggrieved parties in these scenarios.

Joint venture property investments require careful planning and clear communication at every stage of the process. You need to make sure that your investment partner is someone you can trust and who will work with you to ensure that your partnership is fair and mutually beneficial.

Key Considerations Before Starting a Property Joint Venture

There are some important issues which joint venture parties ought to agree upon before the legal documents are prepared and the joint venture commences. Considering these matters at the outset should hopefully reduce the risk of avoidable disputes arising down the line. These would include:

  • Funding: How will the project be financed?
  • Legal Structure: Will the joint venture be an SPV, LLP, traditional partnership, or a simple contractual agreement?
  • Ownership Shares: Will shares be owned equally (50:50) or in a majority/minority arrangement?
  • Project Management and Decision-Making: How will the project be managed, and how will decisions be made?
  • Tax Issues: Are there any tax considerations?
  • Exit Strategy: What is the strategy for exiting the venture, and how can losses be limited if the venture becomes unprofitable?
  • Early Exit or New Partners: What happens if one party wants to exit early or if a new party wants to join?
  • Decision-Making Authority: How will decisions be made? The joint venture partners can decide at the outset how they wish to structure the management and decision making of the project. The parties may decide to delegate responsibility for certain aspects of the project to one party (depending on their respective expertise and skillset).
  • Taxation: All parties need to be clear on their tax obligations, especially if you will all have different responsibilities within the joint venture agreement.

Originally Published 18 July 2024

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.

Mondaq uses cookies on this website. By using our website you agree to our use of cookies as set out in our Privacy Policy.

Learn More