Five Points to Keep in Mind if You Invest in Property Joint-Ventures
06 OCT 2023
In response to a growing interest among investors for portfolio diversification, alternative property investment avenues like joint-venture property investments have become more popular and accessible.
Property joint-ventures (‘PJV’) are agreements between two or more parties that create value through property development, acquisition or management. While generating these values, parties also share risks. Historically, PJVs were primarily accessible to institutional and corporate investors due to their substantial capital requirements. Nowadays, they are on demand for real estate investment across sectors.
In this blog post, we will be discussing five key aspects for parties to keep in mind about PJVs.
No or Less Reserved Matters
Reserved matters are clauses in an agreement that cannot be acted upon by directors without the approval of the shareholders.
It might not always be beneficial to overload your PJVs with reserved matters. The more reserved matters you have, the more reliant you become on your shareholders. In a PJV, a developer would like to minimise the number of reserved matters as much as possible so that no additional shareholder-level approval is required.
This can be achieved by linking approvals to an approved business plan or a development plan. Another way to reduce shareholder involvement is when a matter relates to a group obligation under a transactional document, or an agreement approved under a PJV agreement.
When it comes to reserved matters, what is crucial is that the developer becomes obliged to contact shareholders and seek their approval only in very specific and limited circumstances.
Allow parties to exit the PJV. A party or parties involved in a PJV may seek an exit mechanism, such as one that permits an exit after the project’s practical completion or a couple of years after the PJV agreement is executed.
Where such exit mechanisms are provided for in the PJV agreement, the remaining parties to the PJV should be given the option to purchase the interest sold at a price and on terms that are at least as favourable as those offered to the third parties. Further, a reasonable period, such as 30-business days, should be given to the potential purchasers to respond and decide whether to accept the offer. Only if the parties in the PJV reject the offer, should the seller proceed to sell their interests to a third-party.
How much Minority Protection?
A delicate equilibrium in a shareholders’ agreement can be achieved through carefully drafted voting provisions. The higher the percentage required for passing a resolution, the more caution should be exercised to prevent minority shareholders from posing a threat to the business.
This equilibrium is vital to ensure that on the one hand a minority investor does not frustrate the business and on the other hand, majority shareholders are prevented from engaging in unfair conduct.
Under the UK company laws, minority shareholders are already offered some level of protection. For instance, certain resolutions such as amending the company’s articles of association require a special resolution (at least 75% majority). Therefore, such resolutions can sometimes be blocked by the minority shareholders.
Additionally, companies can further determine the protection offered to their minority shareholders by tailoring their articles of association, imposing various thresholds for different types of decisions. For example, they can increase minority protection by requiring a special majority or even unanimity or conversely, reduce it by using simple majority.
Lastly, minority shareholders can be given veto powers courts typically approve such power only when the decision or the action would be detrimental to the company’s creditors. Therefore, the granting of minority shareholder veto powers should be approached with caution.
Regulating the Termination of a PJV
Cross-default clauses are clauses aimed to protect lenders’ interest by ensuring that if a borrower defaults, the lender can benefit from the default provisions outlined in the breached article. This in overall causes a default triggered in one situation to be carried over to another. While these provisions are aimed to safeguard lender’s interest, they lead to a negative domino effect.
In PJVs developers should exercise caution regarding these cross-default provisions, as they can be triggered by defaults under a development agreement.
It is crucial to control and even limit instances that could result in severe financial outcomes. Such as ‘for-cause removals’ that lead to the termination or removal of the development manager, resulting in the sale of the investment property at a low, discounted price. Such for-cause removals in PJVs should only be available when an individual, the development manager, commits offences that result in imprisonment of not less than six-months.
While there might be a limit on how much an investor needs to invest in a PJV, loans should be made available for additional funding when deemed necessary. These loans should be offered at higher interest rates and should be repaid before other payments. The equity percentage of investor parties in the PJV should only be altered, reduced, when they have committed to providing funding but failed to honour their commitments.
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