Public sector breakfast clubJanuary 2016

Joint ventures

Lynne Rathbone

Introduction• What are your options if you decide to enter

into a joint venture• Some considerations around:

– Structure– Management – Exit

• We are not looking at whether you should enter into a JV – that’s another talk entirely!

Joint ventures • So what is a “joint venture”? • Term has no specific meaning in English law• Describes a commercial arrangement

between two separate organisations that have agreed to work together for a specific commercial purpose – on an ongoing basis or for a single project

Joint ventures

Choice of vehicle

• The first decision that will have to be made is whether or not to incorporate

• Will the JV operate through a separate, incorporated legal entity or not?

Potential structuresWhen considering choice of structure for your JV, there are four basic legal forms:• Limited company (Companies Act 2006)• Limited Liability Partnership (Limited Liability

partnership Act 2000)• Partnership (Partnership Act 1890) (or LP)• Contractual agreement (contract law)

Choice of structure• Two points to be aware of…

– On the “incorporated” side: for LAs wishing to exercise their general trading powers through a corporate vehicle, an LLP is not a permitted trading vehicle (under s95 Local Government Act 2003 or s4 Localism Act 2011 trading powers)

– On the “unincorporated” side: beware partnerships at will…

Corporate structuresCompany Limited by Shares• Some Advantages:

– Limited liability status– Clear governance arrangements/rights (articles

of association, shareholders’ agreement, company law)

– Directors/shareholders – defined roles– Can issue shares to raise capital– Can distribute profits– Easy exit route (sale of shares, sale of

company)

Corporate structuresCompany limited by shares - cont./• Some disadvantages:

– Have to comply with company law procedures– Privacy/filing requirements: certain information

to be filed with the registrar and available on public register (i/c: financial information, annual accounts, shareholder/director details and special resolutions)

Corporate structuresCompany Limited by Guarantee• Some advantages:

– Similar to company limited by shares Limited liability of members and officers Clear governance

arrangements/rights/requirements Board/shareholder defined roles/protections

– Can be (and usually is) ‘not for profit’/have charitable objects/restrictions on distributions

– Easy to change membership (no shares to dispose of)

Corporate structuresCompany Limited by Guarantee – cont./• Some disadvantage:

– Usually no distribution of profits to members– Members don’t own a transferrable security– Members ‘guarantee’ to contribute to debts on

dissolution (usually only nominal sum £1/£10)– Even if have charitable objects, need to

register as a charity with Charity Commission if want to be a charity

Corporate structuresLimited Liability Partnership• Some key characteristics:

– Hybrid between a partnership and a limited company (tax transparent but limited liability status for members)

– Used mainly by professional organisations that would usually be formed as partnership – accountants, solicitors, architects etc. for limited liability status

– Tax transparent (members are taxed, not the LLP)

Corporate structuresLimited Liability Partnerships – cont./• Some disadvantage:

– Not a permitted trading vehicle for LA’s– Filing obligations/public access to information– Must have at least 2 members– Members can bind the LLP and each is an

agent of it– No transferrable shareholding– Tax status may hinder operation of some

ventures

Unincorporated structuresLimited Partnership• Some key characteristics

– Partnership, but with specific structure– General partner, having complete control of

operation but unlimited liability status– Limited partners, having no control or

involvement but in return have limited liability status (to limit of investment) IF LP is registered at Companies House

Unincorporated structures• Limited Partnership – cont./

– Does NOT have separate legal identity– Cannot hold assets, enter into contracts etc– Only limited liability in limited circumstances– Used mainly for investment purposes

Usually silent investors – often equity investment fund vehicle, used as part of larger group structure)

• Not a permitted trading vehicle for LA’s (trading powers)

Unincorporated structuresLegal Partnership• Some key characteristics:

– Governed by the Partnership Act 1890 (not good!)

– Needs a strong partnership agreement in place to override the negative provisions of the 1890 Act…

– No separate legal identity - can’t hold assets, enter into contracts in partnership name etc

– Tax transparent (individuals taxed, not partnership)

Unincorporated structuresLegal Partnerships – cont./

– Every partner can bind the partnership– Every partner liable for partnership losses– No limitation of liability (have to rely on

contractual protections/indemnities)• Main disadvantages:

– Lack of limitation of liability– Lack of separate legal entity through which to

trade

Unincorporated structuresSimple Contract• Some advantages:

– Simplicity of structure– Privacy - no filing requirements– Governance/management – no set structure

imposed– Can be ideal for short term collaborations

(especially where no pooling of assets required)

– Less costly to operate

Unincorporated structuresSimple Contract – cont./• Some disadvantages:

– Unlimited liability– Could potentially be deemed a ‘partnership’– No separate legal identity (so cannot enter into

contracts, hold assets in own name etc)– Need to put robust JV Agreement in place that

documents the entire relationship of the parties…

– Not necessarily ideal for more complex ventures

Some issues to consider…….which may affect your choice of vehicle:

– Finances Funding Profits & losses Risk sharing & liabilities Controls/protections/management structure Employees, assets etc Changes in participation/Exit

Management of the JVApportioning risk and limiting liability

• How will risks be managed and apportioned?• Who will assume liability for losses? • Liability to third parties?

Management• Limited company = limited liability

– Financially – liability of the members is limited to the amount paid for shares (CLS) or amount guaranteed by members (CLG)

• Unincorporated structure = unlimited liability– The contract terms need to be well drafted and

robust in order to limit the liability of the parties (so far as possible) in accordance with the terms agreed between them

Management of the JV• Tools that may be utilised, as between the

parties:– Minority protection / reserved rights – Warranties and indemnities– Insurance– Security (over assets, to protect investment)– Limitation of liability clause– Limiting the extent of authority of the parties

(to act on behalf of the JV partners)

Management of the JV• Degree of integration

– To what extent will it be necessary to pool your assets/rights (eg. IPR)/employees?

– Will depend on the nature of the project, and this may well guide the choice of vehicle

Management of the JV• Degree of integration – cont./

– Contractual JV: less likely to be pooling of assets (as not a separate legal entity)

– Corporate JV: can hold assets/land, enter into contracts in own right, employ employees BUT you if you pool your assets you wil will need to ensure robust management provisions/indemnities are in place during the contract and provision on Exit are properly dealt with to ensure easy division of assets on exit

Management of JV• Degree of integration – cont./

– May be led by type of venture – eg in an Outsourcing-type scenario – (transfer of existing business to JV) there will be a transfer of all assets of existing business, including TUPE/pensions

– Degree of integration may be tax-led

Management of JV• Degree of integration – cont./

– Tying in with ‘risk sharing’… rather than pooling their assets, the parties may decide to retain ownership of their individual assets and just lease/licence their use back to the JV

– Partners can be paid by the JV for the use of assets so leased/licensed (in same way as agreement for provision of back office support by a partner to the JV)

Exit• The contract will set out the Exit provisions

– Often easier to exit a contractual JV, especially if there has been no pooling of assets

– More complex with regard to corporate structure, and the need to deal with statutory obligations as well as contractual commitments (dissolution of the company etc)

Exit• JV Agreement should set out clearly the

intentions of the parties re: exit strategy:– Will the ‘term’ automatically end (time/event)– Can one party can exit during the term, and if

so, on what terms– How will shares be valued?– Will exit only happen on a specific occurrence?– Will the company be sold as a going concern?

ExitCont./

– What will happen on Exit re: Share valuation Division of assets (pooled assets and acquired

ones) What will happen re: continuing IPR rights etc Employee/pensions provisions Assumption/discharge of liabilities

– Can a partner be expelled, and if so on what terms?

Questions?

Overage clauses

Rebecca Toates

Purpose of an Overage?• Proposed use of land undecided – so difficult

to accurately value land at date of sale• Maximises income for landowner, ensuring

best value on a sale (important for charities, trusts and public authorities)

• Sharing of profits from sales• Spreads payments out for a buyer• “Anti-embarrassment” for landowner

Methods of protection• Positive Obligation + Restriction is most

common• Contractual Obligation• Legal Charges• Restrictive Covenant• Ransom Strip

Positive covenant + restriction• Positive Obligation on Buyer to make

payment• Protect with a restriction on title• Deeds of Covenant from successors in title• Methods of Calculating Overage:

– Fixed increments– Increase in Market Value Post-Planning– Sales Based Overage

Key considerations• Overage Period and Percentage• Trigger Events• Planning Permission and Development• Implementation• Disposals• Calculation of Base and Enhanced Market

Value• Profit Calculation• One trigger or multiple triggers?• Wording of restriction

Overage period and percentage• Commercial Terms• Need advice from surveyor / agent producing

heads of terms• Will depend on what Council is trying to

protect through the overage and what value given to the land at date of sale as undeveloped land

• There is no “standard” percentage or overage period

Trigger events• Sale with Planning Permission• Implementation of a Planning Permission• Change of use• Sale with Planning Permission where contracts

exchanged before overage period expires but completes after overage period expires – watch out!

• Grant of Planning Permission?• Plot Sales• Change of control of company – relevant for SPV

buyers of property

What is a planning permission?• Permission for either a specific Development or

permission for anything other than a specific Development – depends how Development clause drafted

• Outline? Detailed? Reserved matters?• Application by Buyer or on their behalf – see case of

Micro Design Group Ltd v BDW Trading Limited [2008] about application by a Seller to push up overage payment

• Consider permitted development rights – no application needed for planning permission

Relevant development• Specific type of development triggers overage v. all

development except for a specific development triggers overage?

• Be clear about types of development permitted / triggering overage

• Reference to Use Class Order – as at time of overage or as varied?

• “Residential Development”? See Harris v Berkeley Strategic Land Ltd re: care homes as residential

• “Agricultural”? What about a house for use of farm worker?

Implementation• S.56(2) Town and Country Planning Act 1990:

“Development shall be taken to be begun on the earliest date on which any material operation comprised in the development begins to be carried out.”

• Pre-commencement planning conditions as triggers?• Exclusion of preparatory works? e.g. demolition and

site surveys?• Implementation by buyer or someone on their behalf• Phased implementation of large developments – single

trigger for payment or staged payments?

Disposals• Sale / Transfer – obvious one – of land or plots• Grant of Lease? Consider long leases and short

term leases for a rack rent• Easements• Disposals to statutory undertakers – substation

leases or transfers of highways to highways authority

• Mortgages / Charges – if excluded then make sure to include disposals by a bank pursuant to a power of sale

• Disposal of individual plots to end users?

Calculating market value• Base Value: Value of land without planning

permission• Enhanced Value: Value of land with planning

permission• Seek surveyor advice – RICS guide for valuations

as applicable at date of Trigger Event• Base Value: Sum sold for originally or value at

date of Trigger Event without planning permission?

• Fluctuations in land value since original sale or previous Trigger? Index link the Base Value

• Deduction of Development Costs?

Revenue / sales overage• Payment on completion of sales• Profit Based Sales:

– Base Sales Price (per plot or per square foot)– Actual Sales Price– Incentives, Extras and Part Exchanged Property– Forward funding/development – based on rent roll?

• Or just price per unit / per square foot sold• Unsold Plots at end of overage period?

Calculate market value of unsold plots• Sales to connected persons?

Deducting costs• Deduct costs of obtaining planning

permission:– Professional Fees– Survey costs– Planning Obligations / CIL

• Deduct Construction Costs?– No if trigger is planning permission/implementation– Yes if sales based overage or market value assumes

units built• Return on cost?• Key Point: does enhanced valuation assume construction

has taken place or not?

Drafting costs deductions• Limitation to “reasonable and proper” costs?• Ability to veto or approve costs?• Cap on costs deduction?• What cannot be deducted?• Deduction before or after applying

percentage?– Before: costs divided equally– After: one party bears all costs – beware accidental

drafting

One trigger or multiple triggers?• May not have been discussed during

negotiations – can have big impact on purchase price

• One Trigger better for buyer – overage disappears after first Trigger

• Multiple Trigger better for seller – overage catches every Trigger during overage period

• One Trigger – risk of ‘soft planning permission’• Multiple Trigger – need to re-calculate Base

Value each time

Restriction• Refers to correct ‘disposals’ requiring certificate• Certificate required confirming overage deed complied

with or does not apply• Obligation to remove restriction at end of period• Who can give certificate?

– Seller only: Seller can keep informed; no risk of fraudulent certificate; but Buyer has to seek certificate every time with increased costs and delays; what if Seller dies?

– Any conveyancer: More difficult for seller to monitor; quicker process as Seller not approached every time; risk of negligent or fraudulent certificate from a conveyancer

Questions?

Contact us…

Rebecca Toates| 0115 908 4862 Rebecca.toates@brownejacobson.com

Lynne Rathbone| 01392 45 8739Lynne.rathbone@brownejacobson.com