If you are thinking of joining forces with another party on a commercial property project, this article is for you. Joint ventures offer a strategic way for parties to collaborate on larger, more complex, and lucrative property projects than they could manage alone. However, while joint ventures can provide significant benefits, they also come with potential risks that require careful planning and legal input from experienced professionals.
In this guide, our highly-skilled commercial property solicitors walk you through what you need to know about joint ventures in commercial property. We’ll cover how they work, their advantages, and key due diligence checks to conduct as well as financing options, structuring strategies, and key contract terms. We will also explore dispute resolution methods and exit strategies to help you navigate joint ventures effectively and successfully.
Contents:
- What is a joint venture in commercial property?
- How does a joint venture differ from other property arrangements?
- What are the key benefits of entering into a joint venture?
- What due diligence should be conducted before entering a joint venture agreement for commercial property?
- How is financing typically arranged in a joint venture for commercial property development?
- How do I set up a joint venture?
- Deciding how to structure the joint venture
- Key terms of the joint venture agreement
- Can a joint venture agreement be modified during the course of a project, and how?
- Exit strategies in commercial property joint ventures
- Can a joint venture be terminated prematurely, and what are the implications?
- How are disputes typically resolved in a joint venture for commercial property?
- Dispute Resolution in Joint Ventures
- Summary
What is a joint venture in commercial property?
A joint venture is a business arrangement where two or more parties collaborate to purchase, develop, and manage a commercial property project. Each party contributes capital, expertise, or other resources, with profits and risks shared in proportion to their investment. The terms of the joint venture, including decision-making, responsibilities, and profit-sharing, are typically outlined in a legally binding, joint venture agreement.
Common use cases of joint ventures include:
- Development of office buildings, retail centres, industrial facilities, and hotels
- Partnerships between landowners and developers
- International investors collaborating with local property experts
How does a joint venture differ from other property arrangements?
Ownership Structure: joint ventures allow multiple unconnected parties to come together to own and control a commercial property project. The parties involved can retain their separate legal identities, while working together towards a common goal.
Limited Duration: joint ventures are typically formed for a specific purpose and limited duration, coming to an end once the project is complete and objectives achieved. In most cases, the parties agree on a planned exit strategy, providing the flexibility and freedom to move onto their next project. Other property arrangements may have a longer-term or indefinite duration.
Shared Risk and Reward: in a joint venture, the parties share both the risks and rewards. This means that if the venture is successful, the profits are shared among the parties according to their agreed-upon ownership interests. If the venture incurs losses or liabilities, these are also shared among the parties. In other property arrangements, the owner(s) bears the full risk and reward of the property.
Separate Legal Entity: joint ventures can be structured as a separate legal entity, such as a limited company. This provides a level of legal protection and allows the joint venture to enter into contracts, own property, and assume liabilities in its own name. Other property arrangements, such as sole ownership or partnerships, do not afford the same levels of protection.
Below is a table summarising the key differences between joint ventures and other property arrangements:
| Feature | Joint Venture | Sole Ownership | Partnership |
| Ownership | Multiple parties share control | One party controls all aspects | Typically between two or more individuals |
| Risk Sharing | Risks and rewards are shared | Owner bears all risks | Risks are shared but with fewer formalities than a JV |
| Legal Structure | Can be an independent legal entity or contractual arrangement | Owned under individual name | Often a simple partnership agreement |
| Duration | Usually project-specific | Usually long-term or indefinite | Varies depending on agreement |
What are the key benefits of entering into a joint venture?
Shared Resources and Expertise: Each party to a joint venture brings its own unique expertise, experiences and insights to the table, which in turn can lead to a more efficient, resourceful and ultimately successful real estate project.
Risk Sharing and Diversification: the financial and operational risks associated with larger, more complex real estate projects are shared among multiple parties in a joint venture. This in turn helps reduce individual exposure where high stakes are involved. There is also the opportunity to diversify your portfolio across multiple property types, market segments and locations.
Increased Access to Capital and Finances: joining forces with other investors often provides access to additional capital or lending options that may not have been available to individual investors. This can help fund larger scale and more lucrative projects.
Expanded Networks: collaborating and connecting with other investors, developers and industry stakeholders through joint ventures can expand your professional network, facilitating deal-making and business development.
Market Reach: joint ventures can provide access or entrance routes to new territories by partnering with local developers or landowners with the local knowledge to help you navigate unfamiliar markets.
Improved Profitability: by sharing costs and expenses, and reducing the financial burden on individual investors, this can lead to improved profitability for each party involved in the long run.
Shared Responsibilities: when working together as part of a joint venture, parties can share the workload and allocate responsibilities based on their strengths and expertise, leading to more efficient project management and decision-making.
What due diligence should be conducted before entering a joint venture agreement for commercial property?
Financial due diligence: It is sensible to assess the financial stability, standing and track record of your potential project partners before committing to a long term business relationship. This typically involves identifying factors such as creditworthiness, liquidity, any outstanding litigation, debts or liabilities that may impact a party’s ability to perform its obligations and commitments in the future.
Partnership Alignment: the project is more likely to succeed if the parties involved are compatible, with shared goals, values, and vision for the project. Identifying and ironing out any potential issues or conflicts of interest before getting started can mean a smoother project for all parties.
Legal and tax implications: it is essential to seek specialist advice and input to determine the ideal structure of the joint venture, ensure compliance with any tax liabilities triggered by the property arrangement, and ultimately protect your legal and commercial interests in the deal. This is a complex area that benefits from specialist commercial property solicitors, like our team here at Harper James.
Feasibility: although joint ventures involve sharing the risks and rewards, it’s important to conduct individual feasibility analyses to ensure the opportunity is viable for you based on the proposed financial contributions, costs and profit-sharing arrangements, and ultimate exit strategy.
Market research: even if you are tapping into the geographical expertise of local property partners, it is important to make your own assessment of the market dynamics and potential for return. This may involve a comprehensive analysis of local market conditions, trends, and competition; the property’s accessibility; potential for growth; and demand for similar properties in the area.
How is financing typically arranged in a joint venture for commercial property development?
Financing is typically arranged through a combination of equity and debt financing:
Equity Contributions: Each party contributes cash, land, or other assets to the joint venture, usually in exchange for a corresponding share in ownership and profits .
Debt financing: such as bank loans or mezzanine financing can be used to leverage the equity investment.. The terms of the debt financing, including interest rates, repayment schedules, and collateral requirements, are negotiated amongst the joint venture parties and lenders.
An example:
A developer partners with a fund to buy and develop land into residential apartment blocks. The developer contributes £300,000 in exchange for 30% ownership percentage while the pension fund contributes £700,000 for 70% (profit-sharing set at 30-70). In addition to the £1M equity, they secure a bank loan of £500,000 to help cover construction costs and other expenses.
The residential development is completed and sold to a third party for a profit of £2M. Before profits are distributed, the interest and principal payments on the loan must first be repaid, which amounted to £510,000
Of the remaining £1.49M (£2M - £510,000) the profit is shared as follows:
Developer 30% = £447,000
Pension Fund 70% = £1.043M
ROI = 49%
How do I set up a joint venture?
The specific steps and timeframes from conception to completion can vary depending on the number of parties involved in the joint venture, complexity, and scale of the proposed commercial property project.
Arranging the joint venture typically involves the following steps:
- Identifying Parties: the first step is to identify potential parties who are interested in forming a joint venture for a commercial property project. This may involve networking, research, or reaching out to potential partners who have complementary skills, resources, or expertise.
- Preliminary Discussions: once potential parties are identified, preliminary discussions take place to gauge their interest and ensure that there is alignment in terms of objectives, goals, and expectations for the joint venture. This may involve sharing information about the commercial property project, discussing potential contributions, and exploring compatibility between the parties.
- Due Diligence: before moving forward with the deal, it is important for all parties to conduct background checks on each other to have a clear understanding of the risks, opportunities, and potential challenges involved.
- Negotiating Terms: once there is a mutual interest in moving forward, the parties enter into negotiations to determine the terms of the joint venture agreement. This involves discussing and agreeing upon various aspects, such as ownership structure, equity contributions, decision-making processes, management and operation, funding arrangements, dispute resolution mechanisms, and the duration of the joint venture.
- Drafting the Agreement: based on the negotiated terms, a joint venture agreement is drafted outlining the rights, responsibilities, and obligations of each party in the joint venture. It is crucial to get the help of legal professionals experienced in commercial property joint ventures to ensure that the agreement accurately reflects the intentions and protects the interests of all parties involved.
- Execution and Completion: after the agreement is approved, it is signed by all parties involved, making it legally binding. The completion of the joint venture agreement may also involve additional administrative tasks, such as registering the joint venture entity or obtaining any board approvals etc.
- Land and Property Acquisition: once the joint venture parties have the protection of a legally binding agreement in place, legal advisors can focus on the due diligence and legal paperwork relating to the purchase/acquisition of the commercial property or land development itself.
Setting up a joint venture can be complex, especially if it is your first-time. Our expert commercial property solicitors at Harper James can guide you through the whole process, ensuring your interests are protected.
Deciding how to structure the joint venture
The two main structures to decide between when entering into a joint venture are:
Special-Purpose Vehicle (SPV): here, the parties specifically set up a limited company, which then owns and operates the commercial property development. The joint venture investors/partners become the shareholders of that company, agreeing ownership, voting rights, financial contributions etc.
As with any other limited company, the key benefit of the SPV structure is that it offers liability protection as a separate legal entity. The downside is that the administrative costs and burdens may outweigh the benefits especially with smaller-scale, quick turnaround projects.
Contractual: the other option is to simply agree all the terms in a fully loaded joint venture agreement. The contract itself specifies and outlines the levels of control, profit distribution, and risk-sharing. These can be customised in various ways to meet the specific needs and goals of the parties involved:
Equity joint ventures - each party contributes equity capital to the project in exchange for ownership interest. The parties share the profits and losses based on their ownership percentage.
Development agreements – this is common in new construction projects where one party who owns the land (landowner), joins forces with other parties who have the expertise and resources to develop it (usually developers and investors).
Profit-sharing structures: parties agree to share the profits from the development based on a predetermined formula or arrangement.
Summary table:
| Pros | Cons | |
| SPV | Allows you to isolate financial risks to a specific project or asset, facilitates investment management. | Can be complex and costly, administrative and filing obligations, may require careful legal and tax planning |
| Contractual Joint Venture | Simpler and quicker to set up and operate with lower costs, easier to terminate than winding-up SPV | Lacking the legal structure and asset protection of an SPV |
SIf you are unsure which structure to adopt, our expert commercial property solicitors can discuss your options and help identify what works best for you and your unique circumstances.
Key terms of the joint venture agreement
Purpose and Scope: the agreement usually starts off by clearly outlining the purpose of the joint venture, including the specific goals, objectives, and scope of the collaboration. This helps in setting expectations and defining the responsibilities of each party.
Ownership and Management: the agreement will specify the ownership structure of the joint venture, including the percentage of ownership held by each party, together with the agreed position relating to its management structure, decision-making processes, and applicable governance.
Contributions and Responsibilities: next, the agreement details the contributions and responsibilities of each party, including financial contributions, assets, resources, intellectual property rights, and other obligations.
Profit Sharing and Liabilities: with the ultimate aim being to make a return on investment, of utmost importance to the joint venture parties is how profits and losses will be shared among those involved.
Term and Termination: the duration of the joint venture, including termination provisions, conditions for dissolution and exit strategies should be considered and set out in detail.
Confidentiality and Non-compete: clauses relating to confidentiality, non-disclosure of classified information, and non-compete agreements to protect the interests of the parties involved must not be overlooked.
Dispute Resolution: the agreement should include clear steps to resolve disputes that may arise during its course, such as mediation or arbitration, so that conflicts can be settled efficiently without costly legal battles.
Can a joint venture agreement be modified during the course of a project, and how?
In most cases, a joint venture agreement can be modified while the project is live if all parties involved agree to and signify the proposed changes. Modifications to the agreement can be made through drafting and executing a formal document in the form of an amendment, addendum or supplemental agreement that outlines the agreed-upon changes to the original contract. This may include specifying additional terms or making modifications to existing terms. All parties must sign the document for it to be valid.
It is important to note that any modifications to a joint venture agreement should be made in accordance with the terms outlined in the original contract. It is essential to consult with experienced legal advisors to understand the potential impact of any modifications on your particular rights, obligations, and financial interests under the joint venture agreement, and to ensure that any changes made are properly executed and legally binding.
Exit strategies in commercial property joint ventures
Sale of the Property: One of the most straightforward exit strategies to realise your investment is to sell the completed property development. The joint venture may be structured to sell the property when certain conditions are met, such as achieving a specific return on investment or after a certain period of time. In some cases, partners may wish to hold onto and let out the property to generate rental income, then sell after it has appreciated in value to a certain level. The proceeds from the sale are then distributed among the partners according to their ownership interests.
Buyout or Sale to a Third Party: Instead of selling the entire property, one party may choose to buy out the other partner(s) or sell their stake to a third party. This can occur when one party wants to exit the joint venture while the others wish to continue.
Refinancing: If the property has appreciated in value and the joint venture has sufficient equity, the partners may choose to refinance the property. This involves securing a new loan to pay off the existing debt and potentially providing cash-out to the partners. Refinancing can provide liquidity for the partners without having to sell the property.
Partition or Division of the Property: This involves physically dividing the property or assigning specific portions to each partner. This strategy is more common when the property consists of multiple units or parcels.
Can a joint venture be terminated prematurely, and what are the implications?
In short, the answer is yes, and the implications very much depend on the circumstances leading up to the termination. There may be several reasons for a joint venture to come to an end earlier, both contentious and non-contentious. There may be legal and or financial implications in the event of premature termination, as well as practical considerations. The first place to turn to is the terms of the agreement itself, which should include detailed termination provisions and procedures. Some examples of reasons and their implications include:
By Mutual Agreement: If all parties involved mutually agree to terminate the joint venture, they can do so by following the termination procedures outlined in the agreement. This would typically involve winding down the project and dividing any remaining assets or liabilities between the parties to include settling any outstanding financial obligations.
Breach of Contract: If one or more parties fail to fulfil their obligations or if there is a breach of the joint venture agreement, the non-breaching party usually has the right to terminate the joint venture and seek compensation in the form of damages.
Force Majeure: External factors may stifle the continuity of the project. Depending on the nature and extent of the impact, as well as any insurance in place, it may be the case that the parties must simply accept their losses (including initial capital contributions, time and resources).
Insolvency: If one or more parties become insolvent or bankrupt, this may trigger a termination clause resulting in the winding down of the joint venture, assets liquidated, and liabilities settled. The remaining parties should seek legal advice regarding rights or claims to recover their losses.
How are disputes typically resolved in a joint venture for commercial property?
Disputes can arise for all sorts of reasons between parties in a joint venture. A comprehensive joint venture agreement helps minimise disputes by clearly defining the rights, entitlements, and responsibilities of each party at the outset. However, disagreements can still ensue – for eg, if one party fails to perform their obligations competently, such as failing to comply with applicable planning or statutory requirements in a redevelopment project, leading to additional expenses or penalties. Depending on the terms of the joint venture agreement and the preferences of the parties involved, common dispute resolution methods include:
Negotiation: The parties may first attempt to resolve the dispute through direct negotiation. This involves discussing the issues and attempting to reach a mutually acceptable solution without the need for formal intervention. Negotiation allows the parties to maintain control over the outcome and can be more cost-effective and time-efficient compared to other methods.
Mediation: Mediation involves the use of a neutral third party, the mediator, who facilitates discussions between the parties and helps them find a mutually acceptable solution. The mediator does not make a decision but assists in the negotiation process.
Arbitration: If the joint venture agreement includes an arbitration clause, the parties may be required to submit their dispute to arbitration. Arbitration is a private and binding process where a neutral third party, the arbitrator, reviews the evidence and arguments presented by the parties and issues a decision. The decision is usually final and enforceable.
Litigation: Starting formal court proceedings in the event of a dispute should ideally of last resort. Litigation can be a lengthy and costly process, but it may be the only option if alternative forms of dispute resolution have been unsuccessful or exhausted.
Dispute Resolution in Joint Ventures
| Method | Best Used |
| Negotiation | As a first attempt to settle conflicts informally without racking-up costs |
| Mediation | Where direct negotiations are proving difficult and can benefit with the help of a neutral third-party to guide parties towards a mutually acceptable but non-binding resolution. |
| Arbitration | When a quick resolution is required in a more formal setting to achieve a binding and enforceable decision that settles the dispute. |
| Litigation | When financial stakes are high and other avenues have been unsuccessful. |
If you find yourself facing a dispute about the terms of a commercial property joint venture, Harper James has a dedicated commercial property disputes resolution team on hand to help.
Summary
Joint ventures in commercial property allow investors to pool resources, mitigate risks, and leverage expertise for successful projects. However, thorough due diligence, careful structuring, and well-drafted agreements are essential to protect your interests and ensure you get the most out of your venture. This is where the help and expertise of specialist commercial property solicitors proves invaluable. We have a wealth of experience assisting developers, landowners, and investors come together for successful joint ventures in commercial property.
