The use of corporate joint ventures to share risk and reward is now an integral part of the business model for many house builders.
Most corporate joint ventures, whether via a company or an LLP, are structured so that they are effectively 50:50 deadlocked vehicles. Neither party has effective control, however that may be defined, whether by reference to a majority of voting rights, a right to appoint or remove a majority of the board of directors or Executive Committee or otherwise.
Set alongside the clear advantages of using such vehicles, there are a number of common traps even for the wary.
Often, JV vehicles are introduced late into the land acquisition or development process.
For example, if a house builder has been awarded a contract under a DPP Framework Agreement pursuant to a process with eg Homes England, it is not uncommon for it subsequently to want to pursue the opportunity through such a deadlocked joint venture corporate structure with a third party joint venturer, such as an affordable housing provider.
Homes England will typically require any such joint venture vehicle with a third party venturer to be controlled by the house builder which has been selected though the procurement process. However, for the reasons stated above, that element of control will not be present. In such circumstances the solution lies in a bespoke negotiation with Homes England or whichever other party is letting the contract, taking account of the extent of the relationship in the context of the procurement.
Similarly, a contract for the purchase of land is often entered into with the vendor in the sole name of the house builder in circumstances where either no joint venture is contemplated at all or even if one is, no firm partner is yet in the frame.
Depending on the terms of the land sale contract it may not be possible to have the benefit of the contract transfer later to a joint venture vehicle. If the mere possibility of a joint venture is envisaged, the house builder should consider setting up a wholly owned joint venture vehicle which will either enter into the contract itself or be named as a permitted assignee of the contract. In this case, care should be taken to ensure that no ‘change of control’ provisions within the contract are triggered at the point when the JV partner is admitted as a shareholder/member to the wholly owned company or LLP.
The lesson in all of this is to retain flexibility in these types of arrangement by factoring in the possible use of a joint venture vehicle at the earliest opportunity and to engage professional advice at an early stage.