Joint ventures are playing a vital role in boosting housing supply but like venturing into any relationship, bear the risk of reaching a premature end.
In some cases, this may be because the partnership has run its natural course, but in others, volatile market or political conditions can sometimes lead to a divergence of views or an unanticipated deadlock between the parties.
Avoiding problems at the end of a relationship requires careful planning at the beginning, so it is advisable to consider, from the outset of the joint venture, how and when the parties may wish to exit.
If one party wishes to exit by selling its interest, then the other party should have the contractual right of first refusal to acquire the interest, but this is only likely to offer a practical solution if the other party is financially strong enough (as well as willing) to buy the other out.
If the non-selling party does not exercise this right of first refusal, it is possible in a 50/50 joint venture that it can still prevent a sale of the other party’s interest to a third party it does not approve of.
An alternative option is to sell the venture as a whole to a third party, but both parties would typically need to agree the terms of a sale; If one of the parties is unwilling to approve a sale, this can be resolved by entitling one party to compel a sale in certain circumstances, for example, once a specific financial or internal rate of return (IRR) hurdle has been met.
In some cases, the joint venture may be specifically dependent upon the continued involvement of one or more of the parties, for example, due to branding or a particular expertise which that party brings to the table. As such, the joint venture agreement must focus on how the venture will cease operation and set out how the assets and liabilities will be apportioned between the parties if a transfer to a third party is not appropriate.
If a clear exit procedure is not included in the joint venture agreement or both parties are unable to reach an amicable solution, then the joint venture may need to be wound up, denying both parties any future earning potential from the partnership.
Partnership working has many benefits for the housing sector but in these uncertain times, there are risks which need careful mitigation from the outset. Agreeing exit terms as part of the joint venture agreement can help smooth the process and provide a level of certainty or comfort in relation to the realisation of an investment, as well as avoid a last resort split which may do little to enhance either party’s reputation.
For further information or advice on exiting joint ventures, please contact Corporate Partner James Lyons.