Wanted: A partner for the future

Key considerations for a real estate joint venture

Establishing a joint venture allows parties to pool together their expertise, benefit from greater funding options, and enter new markets while also sharing risk. However, the practical reality may not always match that picture and having clear, comprehensive legal agreements to fall back on should provide the parties with the confidence to kick start their partnership for a bright, successful venture.

Getting started

At the outset it is essential that parties consider the full organisational structure of the JV and agree how the JV entity will acquire or hold the underlying property asset. They must also plan and document the operating model to allow for smooth and efficient day-to-day operations.

A cap on the total funding amount gives parties visibility of their potential liabilities.

• Implement a tax efficient structure both for the JV and the parties themselves. 
• Consider the mechanics for funding the joint venture – external debt or own funds – and set out a clear process for calling on the parties for any further funding. 
• Agree a cap on the total funding amount, particularly if internally funded, so parties have visibility of their potential liabilities. 
• Identify and document the services each party will bring to the joint venture, reflecting the ongoing working relationship, to reduce the risk of conflicts or delays. For development JVs this will typically include a development management agreement and an asset management agreement alongside the JV agreement.
• Define specific board controls. Each party usually appoints directors in equal numbers for a 50:50 JV. Parties can further agree to delegate certain types of decisions to a management committee. It is advisable to state whether any specific decisions require unanimous consent, majority consent (with or without a specific requirement that a director nominated by each party votes in favour and forms the majority), or shareholder approval. 
• Agree a business plan each year to ensure continued alignment and as a means for reviewing how the venture is progressing in practice.

Agree that you may disagree

It is inevitable that parties will not always agree on all decisions throughout the lifecycle of the JV. Prepare for such circumstances by establishing conflict resolution pathways from the outset.

• Consider the consequences of any failure to fund – where parties are funding the JV themselves – when called on and whether a step-in right is appropriate. 
• Determine a clear resolution process for resolving a deadlock, which can occur in instances where the board is inquorate, or a matter requiring majority consent receives equal votes for and against it. This can involve a shareholders’ meeting, senior executives of each of the parties, or even a third-party expert.
• Include provisions in the JV agreement and the entity’s constitutional documents on a pre-authorisation process for foreseeable conflicts and known issues and an approval process for unforeseen conflicts. 
• Ascertain the specific circumstances that would constitute a default, most commonly including a change of control, a material breach or insolvency (or insolvency type event). Consider whether a cure period is appropriate as well as the practical consequences of a default or a failure to cure. This can include enforcing a buy-out, typically of the defaulting party’s shares in the joint venture at a significantly discounted price, or vice-versa but at a premium. 

Getting your fair share

Even though parties are working together, each party should consider its own long-term goals and anticipated returns.

Restrictions usually include sale or transfer to a competitor or a party with poor reputation or credit rating.

• Set an initial fixed term or a lock in period to provide certainty that the relationship will continue (bar any enforcement of the protective provisions above) while allowing parties to plan an exit down the line through transfer of shares or a sale of the property asset. The mechanics for the sale, including whether any party could have put or call options over the other party’s shares, and the payment waterfall should be set out clearly, and in accordance with the agreed commercial deal. 
• Consider the liquidity of interest in the joint venture and how such interest can be transferred or acquired by either party (other than in instances of default covered above). A right of first refusal/right of first offer could be used to require the “selling” partner to first offer their interests to the “remaining” partner at a pre-agreed price prior to being able to sell to a third party or allow the “remaining” partner to make an offer for the shares before a third party is approached.
• Consider any appropriate restrictions on who the third party entering the JV on sale or transfer of shares can be. This usually includes restricting any sale or transfer to a competitor or a party with poor reputation or credit rating. 
• If any party to a JV has a premium listing, consider the potential application of the significant and related party transaction sections of the Listing Rules to the termination provisions.