Property Development through a Joint Venture
By Peter Micevski, Lovegrove & Cotton.
Despite some mixed levels of confidence in the property industry in Australia at the moment, we have seen approvals for the construction of new homes and commercial premises soar. Whilst approvals for detached housing are pretty close to record highs, it appears that the rise in approvals is largely driven by approvals for multi-unit developments.
Based on our legal work in either drafting, vetting or negotiating building contracts relating to multi-unit developments, we can surmise that multi-unit developments are not “cheap”. In fact, most landowners sitting on “pot of gold sites” (i.e. good development potential and valuable land) will never get the opportunity to realise the true potential of their land, unless a third party shares some of the burden of carrying out the development (i.e planning and construction costs).
Over the past 24 months, we are increasingly coming across situations where landowners are teaming up with developers and entering into arrangements for the landowner to contribute land and a developer (in some instances a registered builder) to develop the land to maximise the gain on the land.
- Outright sale by landowner;
- Sale by landowner with price uplift;
- Landowner sells land in stages;
- Development agreements; and
- Joint venture agreements.
The appropriate structure for a particular landowner and developer will depend on the facts of each case. In our recent experience, developers and landowners seem to be trending towards joint venture agreements.
A “Joint Venture” is an association of persons for particular commercial endeavours with a view to mutual profit, with each participating, usually by contributing money, property or skill.
The feature common to joint ventures is that several persons or businesses participate in a single project rather than a continuing business. There is not necessarily any agreeing, formal partnership or agency relationship. A joint venture might be incorporated with a special-purpose company formed by several participants, to carry out a single project.
A typical joint venture property development will involve a landowner contributing land and the developer footing the construction costs to develop the land into individual lots for sale. In this instance, the landowner retains the legal and beneficial ownership of the land throughout the development and only transfers the land to the final buyers once it has been developed. On the other hand, the developer contributes the construction costs of the development. Once the development is completed and on sold to end buyers, each party shares in the profits according to their contribution to the development.
Whilst it appears relatively straight-forward, in actuality it is not. It is essential that the terms of the Joint Venture Agreement, along with the actions of the parties, do not give rise to a partnership. This is because the potential repercussions of inadvertently forming or operating a partnership can be severe in terms of liability of participants and tax.
An association will only be a joint venture if the parties are acting together for a specific commercial purpose but not in partnership. Central to this is that product or ‘output’ of the venture, rather than the profits, is to be shared.
Regardless of the approach used, what is important is that the parties should understand the nature of the arrangement into which they are entering. A carefully crafted Joint Venture Agreement that then sets out rights and responsibilities and properly defines the relationship of the parties, is an essential safeguard for participants.