Joint Ventures

Time Goes By

Once upon a time, Joint Ventures were seen as somewhat exotic. Something the ‘big boys’ (or girls) might consider, but only in limited situations. Nowadays, they’re an integral part of the property development landscape. They are a tried and tested mechanism for increasing housing supply.

There’s no precise, ‘one size fits all’ definition of ‘Joint Venture’. The Oxford English Dictionary defines Joint (if you ignore the entry relating to cannabis) as ‘sharing in a position, achievement or activity’ and Venture as ‘a risky or daring journey or undertaking’. A more helpful description might be ‘an arrangement between two or more participants who agree to cooperate and work together in order to achieve a common objective’.

Do it

Whilst the reasons to establish a Joint Venture may vary project by project, there are some fairly universal ‘golden rules’ to follow from the outset. Abiding by these rules won’t guarantee success – but ignoring them will greatly increase the risk of heartache down the line.

Be aligned. Whilst bringing different skills to the table is a good thing, having wholly different cultures or objectives will likely end in tears. If one venturer only cares about maximising income in the first 5 years and the other is focussed on maximising the provision of low cost rental homes for the next century, there are likely to be stresses. Everyone is different, so some differences are inevitable, and that is fine. As long as they are acknowledged and addressed at the outset.

It’s good to share. The most successful Joint Ventures usually see both parties sharing equally in cost, risk and reward. They may be putting in different things (from land, to money, to expertise) but if it ever feels to one venturer that they put in more than their fair share or they are getting out less than their fair share then, whatever the documents say, the Joint Venture is unlikely to thrive. Joint Ventures are not the time to ‘win one over’.

Do your homework. It’s important to spend the time and effort to get to know what your prospective partners are like. You will only be able to be sure that you are aligned if you know them inside out. And remember, whilst it’s important that you know and understand the people you deal with day to day, it’s also vital to ensure that their business, as a whole, backs them and thinks the same way. Individuals come and go – and the people who are in the room when you sign may not be the people who are working alongside you in 5 years’ time.

Do more homework. You are embarking on a long term business relationship with your Joint Venture partners. So you need to be happy that they will, in the corporate sense of the word, still be alive in the years to come. You need to be undertaking full financial due diligence. Well drafted Joint Venture arrangements will ‘deal’ with the scenario of one of the venturers becoming insolvent – but, however well drafted the document, insolvency will lead to delay and cost and a world of pain. You’d be better avoiding partners who don’t have healthy accounts in the first place.

Fail to Plan to Fail. A well drafted business plan is an essential foundation for most businesses – but it is even more fundamental for a Joint Venture. Developing a business plan before the Joint Venture arrangements are formally entered into is also a great way of establishing that the venturers’ interests are, in fact, aligned. Before it’s too late to call the whole thing off. If the process seems difficult or is proving too time consuming you’ve got to ask yourself: are these the people you want to lock yourself in with.

Expected the Unexpected. Many risks will be apparent from the outset. Time should be spent identifying those and planning on how to deal with them. Appropriate mitigation measures should be put in place. But all parties to a long-term Joint Venture need to acknowledge that unexpected things will almost certainly happen. You need to make sure that you are content with that and have the confidence in your other venturers, and in the structure of the joint venture, to deal with them as they arise.

Making your mind up

Which type of Joint Venture is right will depend on both the nature, scale and anticipated duration of the business to be operated, the purpose and goals and the requirements of the venturers themselves.

Joint Venture Vehicle: Setting up a new entity, such as a company or LLP, whilst not overly cumbersome these days, does involve a degree of red tape. Papers will need to be prepared and filed, fees will need to be paid, annual accounts will need to be prepared, audited and sent to Companies House (meaning they will become public). Company books will need to be kept and tax returns will need to be prepared. Tax may need to be paid (unless you have chosen an LLP to be the vehicle). You will need to check your existing arrangements with your banks to see if you need their consent to the setting up of the new entity.

On the upside though, the establishment and ongoing operation of a separate entity will impose a degree of discipline and transparency. The venturers will have the benefit of limited liability. So, unless guarantees have been given by the venturers, if the joint venture business is a failure and makes a loss the worst case is that the entity becomes insolvent and is wound up and the venturers lose what they put in. If one venturer wants to exit the Joint Venture, or if both venturers want to bring in a third, that is usually, from a legal perspective, a simple process (for example the transfer of shares in a limited company, if that was the type of entity established). Similarly, if third party funding is to be made available (with associated security) then this can be structured, and ring-fenced, more easily through the use of a separate legal vehicle.

The balance of pros and cons tends to mean that the ‘vehicular option’ is more suited to larger, more complex, longer term ventures.

Contractual: Entering into a contractual joint venture is simpler. It just means you are entering into a contract with the other joint venturers. The contract will cover:

• What each party is contributing to the venture and when (e.g. land, money or services)
• What level of control each party has over the venture and how decisions are made
• How the outputs will be shared (e.g. profit, intellectual property or completed homes)

The simplicity is the primary advantage of this type of Joint Venture. There is a high degree of flexibility in terms of how to structure the documents – since it’s just a contract. So as long as you don’t seek to do anything unlawful it’s pretty much up to the parties what they agree. This type of Joint Venture is said to be ‘tax transparent’ since there is no Joint Venture entity which has to pay tax in its own right. The only type of vehicular option with that benefit is the LLP.

However, because no separate Joint Venture entity is formed, the ‘project’ will not benefit from limited liability or from being ring-fenced from other projects.

Contractual Joint Ventures are generally seen to be most suitable for relatively short term, single projects where there will be little requirement to adapt over time.