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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.
The most common situations for a JV agreement in property development are:
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.
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:
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:
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:
There are a few common ways to deal with the development fee or profit sharing as follows:
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:
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.
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).
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.
Got more questions? Don't hesitate to get in touch and we would be happy to assist further. We offer a FREE initial consultation to answer any questions you might have.
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Joel is a highly experienced property development lawyer that specialises in drafting joint venture agreements for property development projects. He has drafted and negotiated JV agreements for developments as small as 2 lots, as big as 10,000 lots and everything in between.
Get in touch with Joel today on 07 3266 8555 to discuss your next joint venture.
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