Joint Venture Contracts
This week’s blog is going to take a closer look at the joint venture partnership and what exactly should be discussed before entering into a joint venture. This will ultimately shape the contract you make legally binding between joint venture partners.
In case you missed it, last week’s blog discussed some basic principles of joint ventures and their place in the property world. It’s a good starting point if you’re completely new to joint ventures, so head back to the blog on the website and give it a quick read.
A joint venture contract doesn’t need to be a large, complicated, lengthy document, but it’s essential to take the time to get it right before you get going. It protects all the individuals in the joint venture to ensure all possible eventualities are covered, including profit split, responsibilities in the project, the exit strategy, and the backup plan.
First things first, you need to consider who will be involved in the partnership. Usually, the partners are the property professional who will bring their time, skills and knowledge of the industry, and the other partner will provide the funding and oversee payments throughout the project.
Have you considered who will own the property during the renovation?
Typically it will be the individual who provides the finance for the joint venture who will legally own the property. The individual who is not part of funding the property purchase may take out a legal charge on the property (for example an RX1 form) or a legal contract (deed of trust) to ensure the property cannot be sold or transferred without their permission.
Another important point to consider about a joint venture partnership is sharing profits. Here at Nichol Smith Investments, we like to see it as two or more parties coming together as equals, bringing equivalent skill or monetary value to the table, and therefore profits split evenly. However, that’s how we feel about joint ventures, and not all property professionals are willing to split profits equally.
We have discussed buying, renovating and selling properties in joint ventures. This is the traditional way individuals can work together in property to share profits. However, there are plenty of people out there who are keen to work on all different types of property projects. For example, joint venturing on HMOs; where one partner is responsible for the project managing the renovation of the property to be suitable for HMO licensing and usage, and the other funds the purchase and renovation. The rent income (after all expenses) is split 50/50. This type of joint venture partnership is a longer-term commitment. Deciding an exit strategy is vital when considering a joint venture partnership.
What about when things don’t go to plan…
If you decide on an exit strategy, for example, buy to sell, but you can’t sell the property or don’t receive an offer that you (or your joint venture partner) see as acceptable, what do you do? It’s essential to document the plan for the ‘what ifs’ in your joint venture contract before starting out. Discussing these things early on will make decisions easier down the line if the worst is to happen, and you both have it written down in black and white. Say the market changes during a buy to sell project, consider what price you are happy to accept for the property to break even. Consider how long you’re comfortable leaving the property on the market, whether you’d consider an auction sale after a specified period of time, and what you would do if you made a loss.
It’s not always plane sailing. There is always an element of risk in the property market, just like any other investment method. One of our fond property friends comes to mind when we write up joint venture contracts, as they always say ‘cover the five D’s’. The five D’s are departure, disaster, death, divorce, and disagreement. Discussing the five D’s and acknowledging what to do in worst-case scenarios will put you in good stead for a successful joint venture.
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