A joint venture for land development is an arrangement whereby two parties join forces to create a single legal entity for the purposes of developing a piece of land. This can happen where, for example, a land owner doesn’t want to just sell his land but wants to profit from development on it. The other party, the developer, would bring the skill set needed to carry out the work without the need for the capital outlay required to buy the land.
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How does the mechanism work?
There are quite a few ways for the parties to enter into an agreement in order to carry out land development. Whatever form this takes, the same principles apply. These include understanding and agreeing on the roles and responsibilities of both parties. Limitations and liabilities must also be established at the onset. The degree of involvement of the parties doesn’t have to be balanced i.e one of the parties seemingly doing more work than the other. The key is to agree on what is expected right at the beginning.
The most common form of setting up a Joint Venture is by means of what is called a “Special Purpose Vehicle” or “SPV”. This is a legal entity whose sole purpose is to carry out the development in question and nothing more. The SPV is a limited company and consequently limits the owner’s liabilities. Shares are issued to both parties in the SPV and once the development is complete and has presumably increased in value, the shares grow in value and can be sold, which can offer flexibility for the developers.
An alternative form of agreement is called a “Contract Development Agreement” (CDA). The point of note is that with a CDA, a separate legal entity isn’t created and consequently some consider it quite a risky proposition. Both parties enter into a contractual agreement for the sole purpose of carrying out the development. The ease of arrangement is the appeal here as they are straightforward to set up and, from a liability perspective, each party is responsible for their debts and each party is taxed on their own profits.
Both parties could alternatively enter into a simple partnership agreement. The advantage of this is that it is relatively quick and easy to draw up. Both parties are taxed individually. However, as the entity is completely dependent on both parties and if one decides to leave for whatever reason, it is more than likely that the whole process of drawing up a new agreement will have to be started again.
Another set up is called a “Limited Liability Partnership” or LLP. In this instance, the LLP incorporates a partnership but is a separate legal entity and has the same advantages as a limited company. Each partner is taxed on their share of any profits and their liability is limited. As the LLP can own assets and make the partners legally liable, this set up is more appealing to potential investors.
After the structure has been agreed upon, the source of funds also needs to be carefully considered. Depending upon what exactly both parties are bringing to the table and the size and complexity of the scheme itself, the terms of any finance requirements will be dictated by these factors.
What are the advantages of Joint Venture development?
Creating a joint venture to develop land will allow you to bring together key skills which you perhaps need for the project to be successful but don’t have yourself. This includes access to any skill sets that can be brought in as trusted professional advisers and sub-contractors. The benefits of teaming up with other parties are the mix of skills that each brings to the team to make it stronger.
If you are working with experienced joint venture partners, you are adding to the technical skills of the project’s development team, which can only aid success.
What are the disadvantages of Joint Venture development?
The legal and tax status of limited companies can present additional work when it comes to matters relating to taxation for the company and also the individuals themselves.
In many instances, even where the joint venture is operating under a limited company status, financiers will often ask for personal guarantees. There are insurance policies for this but they can be expensive and often come with a hefty excess.
In terms of partnerships, the general partner has unlimited liability for the whole venture, which can be a major risk for an individual to take on let alone the investors you approach.
Actually exiting the agreement can also be sometimes complicated. For a simple partnership, this is likely to be fairly straightforward as each party pays their share of taxes on any profits and moves onto the next project. However, for a limited company or LLP you may need to consider selling your share of the company, including all of the legal agreements required, to facilitate this.
Is there anything else to consider?
Once you have decided to go into business with a partner on a development, the actual JV agreement is a hugely important document and one that needs to be drafted very carefully indeed. All parties need to be 100% clear on their roles, responsibilities and rights within the joint venture. A poorly drafted JV agreement can open up many risks to both parties and create a poor platform for a joint venture to be formed.
The agreement will be specific to your situation and circumstances, so it is impossible to create a ‘one size fits all’ type of document, however, there are some key principles worth considering, such as the roles of all the parties, who will manage the development, what are the profit share arrangements and what restrictions are there in place.
How we can help
We have a proven track record of drafting and advising upon Joint Ventures for development purposes. We will guide you though the process and ensure all checks are carried out swiftly and efficiently and we firmly believe that with the right solicitors by your side, the entire process will seem more manageable and far less daunting.
How to Contact our Corporate Solicitors
It is important for you to be well informed about the issues and obstacles you are facing. However, expert legal support is crucial in terms of reducing risk, saving you money and ensuring you achieve a positive outcome.
To speak to our Corporate solicitors today, simply call us on 0345 901 0445, or allow a member of the team to get back to you by filling in our online enquiry form. We are well known across the country and can assist wherever you are based. We also have offices based in Cheshire and London.
Disclaimer: This article provides general information only and does not constitute legal advice on any individual circumstances.
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