Developers are understandably reluctant to spend legal and other fees drawing up joint venture documents that might be suitable on a particular scheme in advance of the specific opportunity becoming available, because they might not turn out to be suitable or the opportunity may never come to fruition.
However, both parties often find it helpful to have established the broad lines of their relationship, both so that they are a clear starting point internally and so that they set a degree of confidence in dealing with landowners and development agencies. Accordingly, we are often asked to help developers draw up Strategic Partnership Frameworks (SPFs) with Registered Providers (RPs), with a view to site specific joint venture arrangements being put in place when a bid is successful.
The SPF sets out the principles that any such joint venture is likely to follow as and when that opportunity does come forward, but contains appropriate flexibility. Whilst each joint venture opportunity will have its own idiosyncrasies, the SPF gives the parties the confidence to engage in joint bids with an understanding of how they might collaborate if they become the preferred bidder.
The nature of such SPFs is that they are generally not legally binding in nature, save that they would typically provide that the terms are kept strictly confidential between the parties.
Some of the main issues to consider including might be:
- How will the joint venture be structured? In our experience the preferred route is often a limited liability partnership with each of the developer and the RP having 50% membership. This structure is tax transparent, which means that the profits of the joint venture are taxed in the hands of each of the members rather than by in the hands of the LLP itself. It also makes it easier for the RP member of the LLP (which is generally a trading company) to gift aid its share of the profits to its charitable status parent, so saving corporation tax;
- How will each of the parties contribute to the costs incurred in the various stages of the development process? In particular the planning costs, land price, construction costs and sales costs need to be assessed and covered. Typically the costs contributions follow the profit split percentage;
- How will the development costs be funded? Often the parties will be funding the cost for the development from their own treasury, but in certain instances a third party debt will be brought into the joint venture. If so, will that be taken in the name of the LLP and guaranteed by the developer and the RP?
- Any joint venture requires a stringent governance regime in order to ensure that the appropriate decisions are made at the appropriate level. This should be backed up with a mechanism to resolve disputes, usually starting with senior representatives and then escalating through a defined process to expert determination or the courts. On a more practical level, the parties will often want a working group to determine day-to-day decisions which need to be made in order to ensure that the development proceeds smoothly;
“Strategic Partnership Frameworks set out the principles that a joint venture is likely to follow as and when that opportunity does come forward. It also contains appropriate flexibility, giving the parties the confidence to engage in joint bids with an understanding of how they might collaborate if they become the preferred bidder.”
- The most successful joint ventures ensure that the parties bring their respective skills to the joint venture, so their respective roles need to be clearly defined. The SPF would ordinarily provide for separate agreements to be entered into by the LLP and members to ensure that there is absolute clarity on their roles, obligations and responsibilities. For example the developer would usually be appointed as the project or development manager and receive a management fee for providing those services. The contracting and professional team arrangements will need to be clearly set out and risk allocated as agreed. Other services that will need to be allocated are administration services to the LLP and sales and responsibilities for marketing services;
- At the heart of a successful joint venture is agreeing and incorporating the business plan on which the joint venture is anticipated to operate and the programme for the development. Whilst this must contain sufficient flexibility to deal with contingencies the development appraisal forms a key part of this plan;
- What are the principal goals of the parties likely to be in any future joint venture? Typically the RP will want to take the affordable housing from the LLP, but it might want to take any Build to Rent included in any development. The SPF can include the basis of marketing the private units, joint branding etc.
- The final principle that needs to be established is the basis upon which the profits of the joint venture will be shared. Typically if the parties are 50/50 participants the profit will be shared equally between them, but the SPF may contain flexibility for specific joint ventures to be dealt with on a different percentage basis.
In our experience successful joint ventures are about effective communication and clearly defined roles – a Strategic Partnership Framework can be a very good first step towards achieving that goal.