Legal

Commercial and public sector organisations often embark on joint ventures with their regeneration partners. But this does not necessarily mean that they need to set up a joint venture company (JVC) and, if they do, it does not have to be a company.

This article looks at whether it is necessary to form a separate joint venture organisation and what type of vehicle the parties might choose.

As always, the parties must first agree on their objectives and then let their advisers find the best model for achieving them. At its simplest, the traditional JVC involved the parties forming a company in which each party owned 50% of the shares. The parties would vest assets such as land and cash in the JVC as well as liabilities such as development and debt repayment obligations.

Regeneration partners need to think carefully before entering into joint ownership of an organisation. They need to have broadly similar philosophies on running a company. Joint venture vehicles can be expensive to set up and involve complex documentation. The parties need to consider whether they really need to form a new, jointly owned entity or whether they can rely on contractual or property-based arrangements.

Contractual relationships

Parties may be able to work together as separate entities, regulating their relationship by way of a contract rather than as shareholders or partners. For example, a landowner might sell its property to a developer on the understanding that if the site appreciates in value because, say, planning permission is obtained or house prices increase during the development period, the landowner receives a share of the excess value or profit. This arrangement does not involve ongoing sharing of risk or expertise; it is merely a mechanism for extracting an additional payment. It can be dealt with by way of a contractual overage agreement, secured either by a charge over the land or by restrictions on the property’s title.

Joint venture organisations

If a contractual relationship allows insufficient integration of the partners’ interests, there are broadly three types of joint venture arrangement:

Limited liability JVC

The parties set up a company and issue shares to themselves. The respective rights and liabilities of the parties are set out in the company’s memorandum and articles of association and a joint venture or shareholders’ agreement entered into between the shareholding organisations.

The advantages of a company are that it has limited liability and separate legal personality, so it can let contracts and raise finance in its own name and create fixed and floating charges. It gives flexibility with regard to risk and control. The parties can have different size shareholdings, perhaps to reflect the amount of their investment, or different categories of share conferring different rights and duties.

A JVC might reduce each individual party’s exposure to risk, but it cannot eliminate it. A landowner who transfers land into a JVC transfers control of the company, replacing their rights as landowner with rights as shareholder. Even if the company’s constitution restricts land disposals without the former landowner’s consent, an innocent third party can still obtain title if they have dealt with the company in good faith. If the company goes into insolvent liquidation, the liquidator can set aside onerous provisions in the joint venture agreement and can override different classes of share.

The parties also need to ensure that a share in a joint venture subsidiary does not cause difficulties in the context of a party's group structure – for example, group financial covenants may mean that a default by the JVC puts the parent into default.

Other matters for decision are the division of power between the board and management, staffing issues such as pensions, how to deal with deadlock in the decision-making process, ownership of intellectual property rights and the risk of the JVC becoming insolvent. These areas need to be resolved in any sort of joint venture, but problems are potentially more crippling when they arise in a jointly owned company.

Partnership

A partnership is a legal arrangement between parties governed by the Partnership Act 1890 and a contractual partnership agreement. In regeneration projects the partners are generally companies rather than individuals.

The advantages of a partnership over a company are that they involve fewer legal formalities, their constitution and accounts are not publicly available and they are tax transparent (that is, each partner is taxed on their share of profits – the partnership is not taxed separately).

The disadvantages are that the partners have joint and several liability for the partnership’s obligations. Commonly this risk is mitigated by forming a corporate partnership of special purpose vehicles established by each partner. A partnership has no separate legal identity – the partners sue and are sued in their own name.

Limited liability partnership

The LLP was created a few years ago as a hybrid between a company and a partnership. Like a company it has separate legal personality and limited legal liability. Like a partnership it has organisational flexibility and transparent tax status. However, the absence of shareholdings makes it harder for the parties to transfer their interests.

Tax

It is critical that any joint venture vehicle is tax efficient in terms of corporation or partners’ tax, VAT and stamp duty land tax. Although tax considerations should not drive the deal, they commonly determine the type of vehicle that is employed.