Corporate governance in property joint ventures: What you need to know

It is acknowledged that behind every successful partnership is a clear understanding of how parties will work together, a defined plan of action, and an understanding to resolve differences of opinion. This is no different in the world of property joint ventures.

Choice of entity

The key first step will be to decide what type of legal entity will be used for the JV. Typically, this tends to be a private company limited by shares or a limited liability partnership (LLP). Other forms, such as a limited partnerships or unit trusts may be used in property holding structures. This note focuses on structures using English private companies and English LLPs. The choice of entity will often be driven by tax considerations, particularly due to the tax transparent nature of LLPs as against companies.

Companies and LLPs otherwise afford similar benefits to the participants, including constituting a separate legal entity which can hold assets and contracts in its own name, limited liability for the members, and the ability to accommodate a two-layer governance structure, with a delineation of roles a management board or board of directors which deals with day-to-day management and operation of the JV, and the members which ultimately own and control the JV.

Decision-making

Parties need to be clear as to the process for decision-making. This will be determined largely by the relevant proportions the parties hold ownership interests in the JV. Where this is 50:50, no one party has control over the JV, and all decisions therefore needing to be joint and collaborative in nature. The management board/directors will usually have control over all operational functions of the JV, which is important to allow flexibility and allow for the JV to be nimble in reacting to often fast-moving development processes.

The JV parties in a 50:50 JV will typically have the right to appoint an equal number of directors/management board members to maintain the equal nature of the JV at both levels of governance – board and investor. Generally, decisions will be made by majority/unanimous vote, with no casting votes being permitted for the chair of the board.

Some decisions will be reserved for the members of the JV – usually these will be strategic matters, such as changes to the business plan, sale of assets, changes to the JV’s constitution or changes to the management board/directors. Such matters are known as “Reserved Matters”. In English companies, it is important to note that directors are bound by statutory duties, and these may put them in conflict with the shareholder who has appointed them. For that reason, it is common to see certain decisions requiring approval by shareholders, who are not subject to the same restrictions as may apply to directors.

The JV documentation will also set out clearly how meetings of the directors (or management board in the case of an LLP) are convened and operated.

Business plans

A development JV should operate on the basis of a clear, detailed business plan, the first of which will usually be adopted on incorporation of the JV. A process to review and update (as needed) the business plan, as well as any accompanying budget, will be built into the JV agreement. Whilst one partner (or its associate) will take responsibility for preparing and updating the business plan and budget, their approval will usually be reserved for the members acting unanimously. Consideration should also be given to how to deal with the situation where decisions on updating the business plan are not able to be agreed.

• Should a dissenting partner be required to give a full explanation of why it disagrees with a provision?
• Should the existing business plan continue in force until a new one is approved?
• Should there be deemed amendments to any business plan held over to deal with contracts entered into by the JV in the period since it was approved and for any taxes due in the next period?
• Should line items that are not the subject of a dispute be treated as approved and applying in the next period?

The business plan will form a key role in the decision-making process. For example, matters that are specifically included within an approved business plan (i.e. one that has been approved by both partners to a 50:50 JV) should not require further approval, even if they are a Reserved Matter.

Dispute resolution

Implicit in a 50:50 joint venture is the possibility of a deadlock as both parties need to agree on all decisions given the equality of voting rights at board and member level. This means that a clear dispute resolution mechanism should be included in the JV documentation. Often this will start with an escalation process whereby a matter which the board cannot agree on is referred to senior individuals within each participant’s organisation to resolve, failing which the matter may either be resolved to an expert for determination, or less commonly to an alternative dispute resolution process such as mediation. 

When considering whether to adopt one of these procedures, or simply to let the status quo prevail, parties should consider if they will be able to find an expert either willing or able to determine what is often a commercial issue. Also, parties should consider whether they want to risk putting responsibility for a key decision into the hands of a third party.

If these processes do not result in resolution, and there is a no “status quo to prevail” provision, then a failure to agree a matter requiring joint approval may lead to the JV being terminated by a process whereby one party has the option to buy out the other party, or where the JV is liquidated and its assets sold with the proceeds of sale distributed to the members. This is very much a last resort as it means that the development will be seriously compromised and significant value may be lost by both participants. It is submitted that this mechanic, whilst possibly acting as a deterrent to deadlock, is best used only for a small number of fundamental issues, rather than being the default position, as otherwise the JV will constantly be on the cliff edge of termination.

Conclusion and our experience

Whether one is in the early stages of establishing a property joint venture or looking to refine existing governance arrangements, it is prudent to consider how the relevant provisions will operate in practice to further the success of the venture. If you have an existing governance structure that is not working effectively and efficiently, consider how improvements could be made and talk to your partner and other stakeholders (e.g. a bank who may need to approve changes to joint venture documentation as part of any facility agreement) about appropriate changes. This is not about giving one party a commercial advantage but more about creating a workable and fair decision-making structure that is free from manipulation and promotes efficient and fair decision-making.

Burges Salmon’s Corporate Real Estate team have in depth experience in drafting real estate joint venture documentation and advising on governance provisions.

With a team of Built Environment lawyers qualified across England, Wales, Scotland and Northern Ireland, we support clients on real estate matters across jurisdictions and project types. Our Corporate Real Estate team works closely with colleagues in construction, planning, tax, litigation, environmental and finance to provide integrated support throughout the lifecycle of real estate assets.

We have experience across many sectors including logistics, hospitality, office, residential (including build-to-rent and student accommodation), and large-scale regeneration schemes.

If you would like to explore any of the topics discussed above, please contact Jonathan Cantor (Partner, Corporate and M&A) or Gregory Nash (Director, Corporate and M&A)