Entering an agreement with other parties as part of a property transaction can be disastrous if you don’t have full sight of all the legal considerations. For that, you need a solicitor.
There are many financial benefits to joint commercial property ventures, but such agreements are not without risk. We offer independent expert advice to ensure any agreement is legally sound and meets your needs and those of the venture in question.
For help and advice, contact the property solicitors at First4Lawyers.
What is a joint venture in terms of commercial property investment?
A joint venture is a business arrangement between two or more parties where each participant agrees to pool their resources with the other(s) to invest in commercial property. As a result, all of those involved have a right to the profits and may be liable for any costs and losses.
Property investment, development, acquisition and funding can involve joint ventures between any number of parties. Such agreements may occur between property companies, developers, on and off-shore investors, land owners, or public sector bodies and funders.
What do I need to know about company structure?
Joint ventures may be corporate or contractual. Typical joint venture structures include:
- Contractual agreements
This involves one party providing goods, property or services in return for a set percentage of profit. These agreements are confidential and flexible.
This type of joint venture is not a single entity and cannot therefore raise finance in its own name (liability is not limited).
- Unlimited partnerships
These are regulated by the Partnership Act 1890. They give you and others the benefit of lower administration costs and flexible management. Those in partnership have no obligation to publish accounts, and are not restricted in their ability to withdraw capital. They are not obliged to make their taxes public.
However, as a partner you are jointly liable for debts the venture incurs. In line with the Law of Property Act 1925, section 34(2), at least one partner should be named on the agreement.
Where there are five or more partners, at least four partners should hold land on trust for themselves and any other members.
- Limited partnerships
You and your partners must register your agreement under the Limited Partnerships Act 1907. The person named as general partner is in charge of the day-to-day running of the partnership; they are therefore fully liable for all assets and debts. Those named as limited partners do not have an active role and their role is limited to providing capital.
- Limited liability partnerships
This type of joint venture is regulated by the Limited Liability Partnerships Act 2000. The law recognises these ventures as a corporate entity; separate from you and the other partners, all of whom possess limited liability. Limited liability partnerships are also tax transparent.
In addition, there is no need for any of the different partners to contribute capital. Indeed, all of those involved can manage the organisation without danger of personal financial loss. As a separate legal entity, this type of partnership can obtain funding in its own name.
- Limited companies
These must be run in line with the terms of the Companies Act 2006. Limited companies have their own legal identity. They are taxed on profits before any shareholders receive their dividends. The shareholders must then in turn pay tax on this income.
How are joint ventures funded?
Funding by the parties in joint ventures often arrives in the form of cash, or as non-cash assets (e.g. land), in return for debt (to be paid back with interest) or shares.
Because the legal aspects of joint ventures are often complicated, so too are the associated funding structures. Indeed, the process of raising cash for the venture often involves preference shares, convertible mortgages, or convertible loan notes.
Taking part in convertible mortgages involves all manner of equity investments and hybrid debt. Participating mortgages give the lender an agreed share of profit or income, as well as basic interest on the loan.
How are decisions made? What happens when deadlock occurs?
It is normally up to you and other members of the joint venture to agree on the voting rights and other control mechanisms.
As a result, it is common for those in joint ventures to arrange things in such a way that the business is unable to proceed without agreement on fundamental issues.
This can result in a deadlock of the decision-making process; perhaps very much to the detriment of your cash flow and the business as a whole. With this in mind, you should consider this possibility at the planning stage. Methods of dispute resolution include:
- Third party determination – The members refer to an independent advisor for approval.
- Termination – This involves dissolving the joint venture.
- Put and call provisions – Conditions that allow a member to buy or resell the interests of the other party.
- Russian roulette – one party offers either to buy the shares of the other party or to sell its own shares to the other party.
- Mexican shoot-out – Each party makes a sealed bid stating a minimum price for their shares. Whichever sealed bid is the higher ‘wins’ and the ‘loser’ must sell their shares to the other party.
I want to enter into a joint venture around commercial property – where do I start?
Before entering a commercial property joint venture, it would be in your best interests to seek legal advice.
When you contact First4Lawyers we’ll assess your circumstances and look at assigning expert property solicitors who deal with situations like yours on a daily basis. This is the case whether you are seeking dispute resolution, or whether you just want advice.