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Published in December, 2024This Back to Basics note follows our key concepts briefings, which intend to provide high-level insights regarding funds fundamentals, funds vehicles and operational considerations, available here. Introduction This Back to Basics briefing on real estate joint ventures (“JVs”) follows our first briefing overview of the potential structures involved and related structuring considerations. This briefing looks at the following matters for a JV:decision making and control;deadlock and dispute mech­an­isms;fin­an­cing;trans­fers; andend of the JV and exit. These are topics which need to be considered when setting up a JV and are typically covered in heads of terms so that the parties know and can document the framework on how they will work together, that they are aligned and there are mechanism if disagreement arises. The formal documentation will usually include a shareholders’ agreement and related constitutional documents. A limited partnership agreement will be relevant where that form of vehicle is used. Decision Making and Control Much of the structure of a joint venture and the corresponding joint venture documentation will hinge on the role of each of the JV partners and their ability to make decisions and/or control the functioning of the JV. The procedures will depend on the structure but common principles apply. The 50/50 Corporate JV In a scenario where there are two JV partners with 50% interests in the JV, it is common that each JV partner will have the right to appoint and remove 50% of the board of directors of the JV entity. In a scenario where there are two JV partners with 50% interests in the JV, it is common that each JV partner will have the right to appoint and remove 50% of the board of directors of the JV entity. Decisions are typically taken by way of a simple majority of the board. An exception to this mode of decision making can be seen in relation to matters often known as “Reserved Matters”, which are reserved to both shareholders to decide. Carve outs may include agreed certain ordinary course of business maters or things preapproved by the business plan (as a fundamental JV document).” Other levels In other cases, a controlling shareholder (e.g. above 50%) may have a majority of the directors and board / shareholder votes with the minority still being represented at the board but having limited matters it can veto at board or shareholder level. Typical examples of Reserved Matters may include amendment to the constitutional documentation of the JV, the winding up or dissolution of the JV entity, approval of or any material amendment to the terms of any business plan and the level or terms applicable to any third party debt. The use of categories of shares, voting undertakings and, where possible waiver of voting rights, may also achieve a disproportional allocation of economic and political rights in corporate JVs. Limited Partnerships A limited partnership will adopt similar rules with general business decisions being at the general partner level through its board and/or shareholders but with certain fundamental terms, such as external debt or sale of assets, possibly referred to the limited partners. Deadlock and Dispute Mechanisms It is possible that JV partners may be unable to agree on a particular matter. It is, therefore, important that the constitutional documents of a JV set out the procedure applicable to resolving these types of disputes. The mechanisms may also depend on the number of parties and levels of ownership as well as be limited at certain times during the life of the JV such as where a development has commenced. Business Plan A coherent business plan is a means to mitigate the risk of disagreement between the JV partners as it may set parameters for activities which are agreed although the amendment of it is often itself a Reserved Matter. Business plans serve as an important way for the JV partners to organise themselves and pre-determine the strategy to be employed in operating the JV. The business plan or the joint venture agreement may set out criteria such as for when a development should go ahead or gearing or emergency funding is permitted up to a certain level. Deadlock An impasse on a decision may give rise to a “deadlock” in decision making. A typical deadlock resolution procedure involves the holding of a separate meeting where the JV partners share information supporting their respective positions with a view to discussing and resolving the deadlock. Where an agreement is unable to be reached at such a meeting, the partners will typically continue to engage each other for a set period to seek to reach an agreement. Where an agreement isn’t reached, the matter may be further escalated to senior executives within each of the JV partners who will engage each other to resolve the deadlock, and where even this is unsuccessful, the status quo prior to the deadlock may likely pre­vail. Fur­ther measures may involve the appointment of a third-party expert to assist in resolving the dispute. The deadlock resolution process, and in particular, the experts used (if any) will often be dictated by the nature of the project. Where the parties are unable to agree it may also mean that the parties can agree to buy each other out through “shoot out” provisions or the JV is terminated and the assets sold. The exact terms will be for agreement, materiality is a likely requirement and the balances will partly depend on whether the parties have equal interests or one is a majority and the other is a minority party. Conflicts JV arrangements will also need to set out situations where a party cannot vote such as where there is a clear conflict of interest. For example, a party may be in material breach of a key contract or the JV itself. Financing A key reason why JV partners may choose to align with each other is because it is often easier to raise finance on the strength of the JV partners joint levels of expertise and resources. It is, therefore, important that firstly mechanisms for financing the JV, whether it be by external debt or internal funding from the JV partners, and secondly the processes involved in financing the JV, are agreed upfront. For external debt, it is worth considering the instances in which external debt will be sought, and also whether there should be a cap on such third party financing. For internal funding, often JV partners agree and commit to funding the JV up to a certain level, which will likely correlate to the percentage of their interest held in the JV. The instances in which funding will be drawn down, how this funding will be used and when JV partners are required to fund are all typically dealt with in the JV constitutional documents and/or the annual business plan. JV partners are to also consider what the consequences of a failure to fund up to the pre-agreed level will mean. In these “failure to fund” scenarios, it is typical for the JV partner, other than the JV partner who has failed to fund, to be permitted to fund the shortfall, and in return, receive a preferential rate of return and a priority right to repayment. Failure to fund may also lead to a non-defaulting party being permitted to buy out the other under default provisions or its share of the JV being diluted. The JV terms may also provide that the voting or other rights of defaulting partner are suspended. Liquidity and Transfers The liquidity of an interest in the joint venture should be carefully considered and catered for in the JV documentation. Liquidity may arise as a result of a transfer of a JV interest and may also be afforded by the term of the JV or other provisions enabling the assets to be sold.A JV will allow a JV party to transfer its interest in the JV. There are a number of different terms which may be relevant to if and how a JV interest can be trans­ferred:lock-up periods may be agreed (for example during the development phase or in respect of partners which are key for the management of the underlying assets);the consent of the other JV partner may be required in all circumstances or may be withheld if certain requirements are not met such as for the financial or reputational standing of the transferee;the non-transferring party may have a right of first offer, a first look pre-emption right or a last-look pre-emption right; anddrag and tag rights might apply. Pre-emption First look pre-emption entails the selling JV partner notifying the other JV partner that it wishes to sell and specifying the sale price. The other JV partner(s) then has the option, possibly after and based on a third party valuation, to offer to purchase the JV interest and if it/ they do not, the selling JV partner may sell to a third party at a price no less than the relevant sale price or within a reasonable margin of it. Last look pre-emption involves the selling JV partner notifying the other partner of an offer to buy from a third party, and providing the JV partner with the opportunity to match the offer. A first offer right gives the non-transferring partner a right to make an offer for the interest which if not accepted sets a benchmark for a third party sale. Drag and tag rights These are commonly required where there are minority stakeholders in a JV, but they can also be used in a 50:50 JV scenario. A drag right allows a majority investor to force the minority to sell on the same terms offered to it, so that the third party buyer is able to acquire 100% of the interest in the JV. In contrast, a tag right is a right held by the minority stakeholder entitling it to sell its stake along with the majority investor so as to avoid that minority stakeholder remaining in a JV with a third party. Term and Default JVs may have a set period or they may not have a fixed term, but certain events may trigger a termination of the venture such as a the sale of the asset(s) held by the JV, the sale of the JV vehicle itself or as a result of a trade sale or initial public offering. JVs may also terminate before the above for cause events either as a termination event or as a result of one party buying the other out. Cause events include where a JV partner becomes insolvent, a change in control of  a JV partner, a failure to fund or a material breach of the JV documentation which is not remedied following an opportunity to cure such breach. Unlike termination by way of mutual agreement or the effluxion of time, termination for cause events may trigger a right for the non-defaulting party to buy out the defaulting party at a discount. The information contained in this publication is for general purposes and guidance only and does not purport to constitute legal or professional advice. 

A clear understanding of the security available is fundamental for lenders and borrowers. To assist, CMS has launched an interactive International Guide to Real Estate Finance. This provides a clear and...