What is a property joint venture?
Entering into a property joint venture
What is a property joint venture?
A property joint venture is an arrangement between a landowner and developer to develop land and share the resulting profits.
If you own land that could make a good site for development, you might be thinking of teaming up with a developer to realise that potential rather than doing it by yourself. A joint venture allows you to stay involved with the development process and get a share of the profits when the development is sold, but it is a complex commercial arrangement and so you need good legal advice to protect your interests. Don’t make the mistake of leaving this until you are drawing up the contracts.
‘Development companies are increasingly using social media to find out who owns vacant land and to approach them,’ warns Kimat Singh, head of the commercial property team with Kerseys Solicitors. ‘They might be good joint venture partners, but landowners are likely to get a better deal if they take a well-informed and proactive approach.’
Kimat outlines the points you should consider relating to a joint property venture.
How to structure a property joint venture?
It may use a limited company, partnership, limited liability partnership or contractual agreement. The right structure depends on control, liability, funding and tax.
A joint venture is a broad term that covers a range of legal structures which allow two individuals or businesses to work together on a specific project, ideally with clear agreement on how the project will be carried out and how the partners will take their profit once it is completed. It could be structured as a company, a partnership or just a contractual arrangement. Your solicitor will be able to advise you on the pros and cons of each and help you choose the right one for your particular situation.
How should I choose a developer?
Choosing a development partner is no different to choosing any other professional. You should look for a developer with the right skills and experience, and a decent track record and reputation. Don’t sign up with the first company to knock on your door. It is better to take your time and meet with a few developers to see whose ideas fit best with yours, especially if you will continue to live nearby. A development project will usually take at least a couple of years, so you should choose someone you think you can get on with in the long term.
The property joint venture agreement
The property joint venture agreement itself is of paramount importance, and there are a number of key issues that must be covered. It is vital to get legal advice at this stage to make sure you do not overlook anything, particularly if you are going into a joint venture for the first time. Your solicitor will talk you through everything you need to consider in your specific situation but there are some issues which must always be covered:
Decision making
for the development to run smoothly it will be more efficient for the developer to make day-to-day decisions about the project, but you will want the right to participate in more significant strategic or financial decisions. You will also need to set out what happens if there is a deadlock.
Funding and profit sharing
where will the funding for the development come from and how will the eventual profit be shared? This often includes a detailed formula for calculating the value added to the land by the development, taking into account the initial value and the costs incurred in carrying it out. It can sometimes even take a while to agree on which costs should be deducted before the profit is calculated.
Obligations on the developer
it is absolutely crucial to have a clear and robust set of developer’s obligations, because it is the developer who will realise the project before you can take your share of the profit. Your solicitor will advise you on what these obligations should be and how easy it will be to enforce them if the developer defaults. There will usually be a series of milestones, with target dates the developer must aim to meet, for example, applying for planning permission, getting any other consents that are required, starting on site and completing the development.
Cost overruns and delays
in a volatile global market, it can be hard to estimate the cost of building materials accurately. The developer is likely to ask for some contingency arrangements if costs increase significantly and you should consider how this will be dealt with, given that it will affect the end profit. You should also think about how to deal with delays caused by factors outside your control or the developer’s control. You may agree to extend target dates but there should also be an ultimate longstop date after which either of you can bring the arrangement to an end.
Exit strategy
the joint venture agreement must also cover how the completed development will be sold, how profit will be shared and how the joint venture will ultimately be wound up. Depending on how large the site is, you may agree that the development can be delivered in sections. This can have the advantage of allowing you to take profit on each phase as it is completed and sold, instead of waiting for the entire site to be finished.
Protecting yourself in case the developer defaults
Most joint venture agreements will structure payments in a way that gives the developer an incentive to perform, because the bulk of the profit is shared out only once the development has been completed and sold. However promising the development looks at the outset, there is always a risk that the developer may default or even fall into insolvency. There are various ways you can protect your interests and your solicitor can give you detailed advice. They may include step-in rights, which would give you the right to take over and appoint a different developer; and a guarantee or financial bond from the developer as security.
How we can help
Joint ventures need careful thought, because they are long term arrangements during which decisions will need to be made, relationships maintained and work kept on track and on budget. You need advice from an experienced lawyer, and our commercial property team is here to help you, contact us at:-
Kerseys Solicitors in Ipswich at [email protected] on 01473 213311 or
Kerseys Solicitors in Felixstowe at [email protected] on 01394 834557 or
Kerseys Solicitors in Woodbridge at [email protected] on 01394 813732 or
Kerseys Solicitors in Colchester at [email protected] on 01206 584584 or
Kerseys Solicitors in Stowmarket at [email protected] on 01449 613631 or
alternatively visit our web site and click “Call Me Back” where one of our commercial property solicitors will be happy to contact you at a time that is convenient to you.
See below a summary of frequently asked questions regarding property joint ventures
How can the joint venture be structured?
It may use a limited company, partnership, limited liability partnership or contractual agreement. The right structure depends on control, liability, funding and tax.
How are profits shared?
The agreement should specify the land’s initial value, permitted development costs, developer fees and how the remaining profit is divided.
Should I transfer my land to the joint venture?
Not necessarily. Retaining ownership until agreed milestones are met may provide greater protection against developer default or insolvency.
How should I choose a developer?
Check their experience, financial position, funding, reputation and record of completing similar developments. Do not rely only on their proposal.
Who makes the decisions?
The developer may manage daily operations, but the landowner should retain approval rights over major matters such as planning, budgets, borrowing and sales.
What if costs increase or the project is delayed?
The agreement should include an approved budget, contingency arrangements, development milestones and a final longstop date.
How can I protect myself if the developer defaults?
Protections may include retaining the land, step-in rights, termination rights, guarantees, performance bonds and restrictions against the title.
What happens when the development is completed?
The agreement should govern marketing, minimum sale prices, phased sales, distribution of proceeds and termination of the joint venture.
When should I obtain legal advice?
Before agreeing heads of terms, exclusivity or allowing the developer to begin planning work. Early advice helps preserve your bargaining position and protect the land.
Are there tax consequences?
Yes. Capital gains tax, corporation tax, income tax, VAT and Stamp Duty Land Tax may apply. Specialist tax advice should be obtained before the structure is agreed.
