A joint venture agreement is an arrangement between two or more parties, with a joint aim. The parties agree to cooperate to achieve this common objective. The parties will pool their resources on an ongoing basis or for a specific project. These contributions may be in the form of cash or assets, for example land, or contractual rights. The parties may include landowners, investors, developers and public sector funders, who agree on the mutual objective. The property joint venture may be used in many different circumstances. For example, a local authority may work with a developer to redevelop an area. Another example is where a landowner contributes the land, and a developer will contribute expertise to the project.
1. Different structures of property joint ventures
The property joint venture may take different structures, depending on the aims of the parties and nature of the project, their funding and security and often tax implications.
Contractual joint venture
A contractual joint venture is the most common form of joint venture in property. Rather than forming a separate vehicle to carry out the objective, the parties will form an agreement which contains the obligations and rights between the parties. It is important to note that the nature of the agreement is flexible enough to allow the objective to be achieved, meaning that a lengthy contract will not work as a joint venture agreement. The contract may take into account different circumstances. For example, the landowner may be entitled to a share of the future profits. This may be dependent on the granting of planning permission and will be drafted into the contract more specifically.
Joint venture limited company
A joint venture limited company may also be formed so that the parties own shares and a memorandum of association sets out the way that the company will run and how decisions are made. This may be a good structure for parties that have an ongoing relationship on multiple projects. It is common for the parties to be companies themselves. The benefits of this structure is that it provides limited liability to the parties, so any losses will be attributed to the joint venture. However, if the source of funds require a personal guarantee, the liability may pass to the guarantor in the event that the parties do not comply with their requirements. By using shares, the company structure allows different parties to have different equitable preferences, allowing flexibility to the shareholders. This arrangement is however permanent and costs could be high for a potentially short term project.
A partnership may be formed with a common goal to make a profit. However, this may have liability which a limited company does not. Although the partnership structure is transparent in terms of tax, there is uncertainty as specific terms are not agreed and the partnership may cease when the objective is complete. Partnerships may also take the form of a limited partnership or a limited liability partnership, which have different tax and liability implications.
2. What do I need to consider?
When deciding which structure of joint venture to use, the following factors may be taken into account:
- Contributions of each party.
- The financing of the joint venture and how much control this may give to one party over another.
- The separate objectives of each party, for example, cash flow and how profit is dealt with.
- Who will manage and control the joint venture, and what powers are given to each party.
- What happens if the parties do not agree.
- What happens if a party wishes to end the joint venture.
- Tax implications of each structure.
- Confidentiality or publicity of information or accounts.
- The risk vs reward factor.
- Liability of the parties is dependent on the chosen structure.
Before deciding how you wish to proceed an independent accountant should always be involved in providing the necessary advice in relation to tax implications.
Call us today for advice
Kew Law is able to help with advice around structuring a property joint venture with your best interests at heart.
Request a Call Back
"*" indicates required fields