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Joint Ventures in Development Projects

View profile for Derryn Rolfe
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It can make sense for companies to join forces in development projects, with each contributing their expertise, sharing the workload, or allowing to take on jointly projects larger than they could do alone. Whatever the reason, the question is always: what sort of structure should we use?

There are two basic types of joint ventures (JVs): corporate; or contractual.

Corporate JVs are the classic format, with the two companies setting up a jointly owned single purpose vehicle (SPV) for the project. SPVs are commonly used in the development sector for ring-fencing liability, with developers setting up an SPV for each site. These SPVs are wholly owned by the main company, and once the asset is built and sold the SPV is closed.

SPVs for JVs are slightly different, in that although they are set up just for the particular project, the parties (and there can be more than two) have to agree ownership, voting rights and financial contributions and payment. The SPV will be a limited company, and for the duration of its existence all the administration, filing at companies house, auditing etc has to be carried out as it would for any other company.

The advantage of a corporate JV is that it limits the parties’ liabilities in the same way as any other limited company; the disadvantage is that the costs and administration might outweigh the benefits on a short-term, small-scale or uncomplicated project.

In those situations parties often turn instead to a contractual JV. A contractual JV doesn’t involve setting up a new company; the parties simply enter into a contract that states which party is to provide what – finance, land, labour, materials, design expertise etc – and then defines what happens to the profit when the build is completed and sold on.

Agreeing the financial deal is usually the difficult part, as it requires equating apples with oranges. If one party owns some land, for example, then the value of the land has to be ascertained and agreed. If the project is short-term that is straightforward, but if it’s likely to last over a number of years then changes in the land value, and how that affects the profit share, have to be considered. Labour and materials prices have to be at agreed rates or on an open-book cost-plus basis, with the latter being the most popular route at present because of inflationary rise.

One of the most important issues that needs agreement is what defines completion of the works, as if one party is contributing the labour and the other the land there could be a risk of a disagreement. Fast-track dispute resolution clauses can also be used to avoid a small disagreement souring the relationship and the success of the project, although their applicability can be subject to the requirements of the statutory adjudication rules.

There are obviously a whole range of issues that need to be considered whichever type of JV is chosen, so it is always better to get professional advice.

Our Construction and Engineering team can help with corporate Joint Ventures and would be happy to discuss your requirements. Please get in touch for further information.