A joint venture agreement, also known as a JV agreement or development agreement, is one of the most important documents when carrying out a property development with one or more partners. The purpose of the the JV agreement is not only to document the obligations of the parties, but also to document what happens when something goes wrong.
A lot of people think joint venture agreements and development agreements are only for major property developments and not for smaller projects…and they’re wrong. If you’re doing a property development project with someone else, you should have a development agreement or joint venture agreement from day one to ensure the obligations of the parties are clear.
While you might have agreed on who pays the major development costs and who carries out most of the work but did you agree on who gets to name the development? How about what happens when you can’t agree on something? What if someone dies or becomes insolvent? Who will be providing personal guarantees if required? A joint venture agreement documents all of these things from the start to avoid arguments in the future.
When is a Joint Venture Agreement or Development Agreement used?
The most common situations for a JV agreement in property development are:
- Landowner and Developer – one person contributes the land and the other person carries out the development. It is common for the developer to pay the development costs and for the parties to share in the proceeds once the developed lots are sold.
- Two Developers – the two parties acquire the property and carry out the development together, usually sharing costs and splitting the development obligations. The parties will then share in the proceeds of the developed lots once sold, often in proportion to the development costs they paid along the way.
- Investor and Developer – the investor pays to purchase the land and funds the development costs and the developer carries out the development. The developer can be paid a fixed amount, a percentage of the sale proceeds or a combination of both with a development management fee paid while carrying out the development and then sharing in a portion of the sale proceeds.
Although these are the most common situations, you should always have a joint venture agreement in place if you’re carrying out a property development with two or more parties.
Joint Venture Agreement Template
Each JV agreement is a customised document that reflects the agreement of the parties and no two documents are the same. This means there is no such thing as an ‘off the shelf’ joint venture agreement.
A general joint venture agreement template is as follows:
Obligations – Party 1 (usually the Developer)
This section outlines the obligations of the first party and is usually split into a number of clauses.
In the case of a landowner and developer joint venture agreement, the first section will outline the obligations of the developer. Some of the clauses that might be included:
- Developer to carry out the development – What exactly is the developer doing? Will plans be annexed so that it is clear what the development will look like? Does the developer need to procure a development approval and if so, what happens if it is not approved?
- Costs to be paid by the developer – Is the developer paying all of the development expenses? Where there is a profit split, is there a control on the expenses that can be incurred and a budget? What happens if an expense goes above the budget?
- Warranties from the developer – The developer usually warrants that they have the skills and expertise to carry out the development and that they will comply with all laws in doing so.
Obligations – Party 2 (usually the land owner)
This section outlines the obligations of the second party and is also usually split into a number of clauses.
In the case of a landowner and developer joint venture agreement, the second section will outline the obligations of the land owner. Some of the clauses that might be included:
- Land owner to provide the land as security for development funding – What if there is an existing mortgage? Who will go guarantor for the loan? Who will be responsible for repayment of the loan? What happens if the development agreement is terminated before the loan has been paid out?
- Land owner to provide the developer and its consultants with access to the property – Are there any notice requirements before accessing the land or can they access the property whenever they want? Is there an indemnity for any loss or damage caused? Does the developer have to take out public liability insurance before accessing the property?
- Land owner to grant the developer a power of attorney to execute joint venture documents – It is usual for the developer to execute sale contracts, disclosure documents, survey plans and other documents under a power of attorney throughout the development.
- Costs to be paid by the land owner – is the land owner paying all of the rates, water, land tax and other outgoings for the property while it is being developed? Is the land owner contributing to other development costs such as construction and obtaining the development approval?
Development Fee / Profit Sharing
There are a few common ways to deal with the development fee or profit sharing as follows:
- Each parties receives a set percentage of the profit from the development.
- The developed lots are split between the parties and then they can deal with them as they like.
- The landowner is paid a set amount for contributing the land and the developer receives all profit above the land amount.
- The developer is paid a set amount for their development services with a performance bonus if certain profit levels are achieved and the land owner receives all other proceeds.
Each JV agreement is customised to suit your personal needs and there is no ‘right way’ to deal with the development fee and profit sharing.
The distribution of sale proceeds are often drafted as ‘waterfall’ clauses which means that there is a set priority in receiving payments. These waterfall clauses usually provide that sale proceeds are distributed in the following priority – ATO for GST withholding, bank to pay back the mortgage, landowner for any set land payment, developer/landowner to pay back development expenses and then profit sharing for the parties.
Another thing to keep in mind is that the way the profits are shared can impact on whether the joint venture is a tax partnership. If the joint venture is a tax partnership, this means that the parties are jointly and severally liable and that partnership tax returns must be lodged. You should always seek specific tax advice before entering into a JV agreement.
It is common for the development land to be mortgaged to fund some of the development expenses and the development agreement should be clear on whether this is permitted and if so, how it is going to work. Some of the points to consider:
- Will the developer and the land owner be providing personal guarantees?
- Does the land owner have to pay out any existing mortgage or will it be refinanced with the construction funding?
- Is there a maximum loan to value ratio?
- Who will be the borrower?
- Will funds be held in a project bank account?
- Is there a restriction on how the loan proceeds can be spent?
Appointment of consultants
All Development Agreements should outline who is responsible for choosing and appointing consultants. Does the developer get to decide or do both parties have to agree? What if the parties can’t agree? What if the cost is greater than the expected cost in the budget? Can the developer appoint a related company?
This clause is especially important for major consultants such as builders, civil works and real estate agents and this is where we see the most disputes.
Naming and Signage Rights
This is especially important where you have a joint venture with between two developers or a developer and an equity partner and both want to be able to ‘claim’ the development as their own. Where this is the case, the JV Agreement should make it clear who owns the intellectual property associated with the branding for the development and who can erect advertising signing around the property.
Another consideration is who gets to choose the name for the development (including street names for large land subdivisions).
Project Control Group
A project control group, commonly known as a PCG, is a committee made up of representatives of both parties to make decisions on the development.
For a developer and landowner joint venture, it is common for the developer to have complete control over day to day decisions for the development. The landowner may then be able to vote on major decisions that impact on profit sharing such as appointing consultants that exceed the budget.
For a joint venture between two developers or a developer and an investor, it is common for both parties to have their roles clearly defined for day to day operations and then for major decisions to be made through the PCG.
Agreeing on which decisions are made by the project control group is always a balancing act between allowing the parties to efficiently carry out the development without unnecessary red tape and ensuring that each party has a vote on matters that are important to them.
For a joint venture with two parties, there must also be a mechanism to resolve a dispute where there is a deadlock in voting. This is usually a tiered process and tied in with the dispute resolution clause of the joint venture agreement.
Frequently Asked Questions
- Does it matter which State you are located in? – No, joint venture agreements are generally not specific to any State. McAndrew Law can assist with joint venture agreements for all of Australia
- How much does a joint venture agreement cost? – The cost of a joint venture agreement can vary greatly depending on the terms of the agreement and the quality of the instructions provided to our office. A basic joint venture agreement starts at $2,000 and then the price goes up from there as the agreement gets more complex. As a generally guide, most development agreements and JV agreements are around $2,500 to $5,000.
- How long does it take to draft a JV agreement? – Drafting can take anywhere from 5 to 15 hours for most development agreements and this varies depending on the quality of the instructions and the terms of the agreement.
Got more questions?
At McAndrew Law, we are experienced in drafting joint venture agreements and can ensure that your interests are protected from start to finish. Call us on (07) 3266 8555 or get in touch with us online to get started. We offer a FREE initial consultation to discuss your needs.