‘Development companies are increasingly using social media to find out who owns vacant land and to approach them,’ warns Malcolm Rees, a Solicitor in the commercial property team with QualitySolicitors Parkinson Wright. ‘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.’
Malcolm outlines the points you should consider.
Joint ventures and how to structure them
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.
Choose the right partner
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 joint venture agreement
The 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.
For further information, please contact Malcolm Rees or a member of the commercial property team on 01905 721600 or via email worcester@parkinsonwright.co.uk
This article is for general information only and does not constitute legal or professional advice. Please note that the law may have changed since this article was published.