FUNDAMENTALS OF DRAFTING A JOINT VENTURE AGREEMENT IN REAL ESTATE DEVELOPMENT.
A Real Estate Joint Venture (JV) is a transaction emanating between two or multiple parties to jointly perform and combine resources in developing a real estate project.
Due to the exponential growth of real estate in urban cities of the world, land has become very expensive, hence most large projects are financed and developed through real estate Joint Ventures.
JVs allow real estate developers (individuals with extensive experience of developing and managing real estate projects) to work with real estate capital providers (entities that can supply capital for a real estate project) and landowners or land investors.
A Joint Venture in real estate also enables realty businesses to take part in investment projects of different kind, such projects include; Estate Developement, Management, Site and Service, Hotel and Hospitality, Short let (Air b n b) amongst others.
Further more, trans border Joint ventures allows a real estate or investment company, take their investment into projects in other countries by entering into a joint venture with a local partner. In this case, the home company may either be the operating partner or the capital partner.
How does Joint Ventures Operate in Nigeria in real estate?
In Nigeria, Most real estate joint ventures comprise of two separate parties:
The Developer; and the land Investor. The Developer is usually an expert in an array of realty businesses and is responsible for the development, and often, management of the delivered project. A typical Developer is usually a highly experienced professional from the real estate industry with the ability to source, acquire, manage, and develop a real estate project. Some developers also have off-takers and in-depth marketing resources to buy into the delivered real estate project. On the other hand, The capital member or land owner partakes nominally in the venture as the owner of the land with equity interest towards the sharing of the profit of the development with the Developer.
In a Real Estate Joint Venture, each member is liable for profits and losses relating to the joint venture. However, this liability only extends as far as the particular project that the joint venture was created for.
Some common types of a real estate joint venture projects include:
- Mini and Major Real Estate Development: This includes Mass Housing project and Luxury homes.
- Hotel and Hospitality Development: This often includes the construction of hotels, and short let apartments. The Developer is usually billed to build, manage and share profits with the Investor/Land owner.
- Office and Commercial Development: This is more popular in urban or areas designated to be business districts.
Essentials of a Joint Venture Contract/Agreement.
A formal contract is important to the smooth running of a Joint Venture. It ensures that there is clarity on the limited purpose of the Joint Venture and on the parties rights and duties. The following are some of the main terms to be found in a Joint Venture contract:
At Lawscope legal hub, we have provided the following insights into terms of critical importance in a real estateJoint Venture contract as follows:
- Parties: This Essentially provides clarity on the Persons involved in the Joint Venture. Address is provided and a contact person covering the interest of each party in the negotiation may be provided as well.
- Clause A- Introduction: Here, a brief recital is provided of the transaction. More details of the parties, their business and involvement can be introduced as well. This portion is where the root of land title may be provided as well.
- Clause B- Definition of Terms: This portion of the agreement provides clarity of terms that needs specific interpretation so as to forestall any form of ambiguity in the transaction.
- Clause C- Scope of the Project: We believe that this portion of the contract will itemise every critical milestone of the project. Such may include: Agreement and Executions of Joint Venture Agreement/Power of Attorney; Building Design; Survey; Building Approval Process; Construction Proper;Distribution and Handover; Management amongst others.
- Clause D- Purpose and Description of the Project: This portion is important to crystallise the essence of the joint venture project. Here, Parties agree on what is to be constructed, at Lawscope Legal Hub, we include the prototype designs of the Project for emphasis and clarity.
- Clause E- Capital Contribution: Under this sub-head, the Capital/land contribution is highlighted, its root of title description is provided, also what the contribution of the developer is, is highlighted as well. He is expected to often times provide technical no how, marketing, and finance.
- Clause F- Project cost and equity participation: It is important for the contract to stipulate the cost of contributions by both parties. Usually, we use this sub-head to state the land value and sometime indicate the Estimated total Bill of Quantity for the construction.
- Clause G- Project Preliminary: We have included this sub-head because It is important for the contract to state how the project is meant to commence. The land owner is required to deliver to the Developer an un-encumbered land, and covenant undisturbed possession through the construction period. The developer is meant to discuss the building approval process and other other title defect that may be corrected before the project commences.
- Clause H- Liability: This Clause intends to mirror the consequence of any defect in title on the part of the land owner, or defect in performance on the part of the developer. Setting this part straight, is critical in the joint venture. Consequence of Structural defect can be stated as well especially as it bothers on Latent and Patent Defects.
- Clause I- Commencement: It is important at this point for the contract to reflect the date of Effectuation of parties responsibilities in the Joint Venture.
- Clause J- Duration: It must be noted that a clearly spelt out duration clause is non-negotiable in a contract as this. Wherefore instance the contract is agreed to span for 18 months, the contract duration clause is incomplete if the duration period is not qualified. Hence it is important to draft this clause like this: Project Preliminaries : 3 Months; Construction Period: 14 Months; Moratorium: 1 Months. It should be noted that the moratorium is usually between 1-3 months in a standard JVA.
- Clause K- Title Document Custody: To safeguard the interest of the developer, subscribers, off-takers in the project to be delivered, it is important to agree for the Title documents in the possession of the Owner be deposited in escrow. For this purpose, an escrow clause may be included in the agreement or a separate escrow agreement may be drafted to govern the access to the title documents through the duration of the contract and beyond, especially when the title is expected to dissolve in the new equity owners.
- Clause L- Duty of Investor: Under this clause, the agreement states the things expected of the land owner such as; provision of Site and Way unencumbered; disclosure of lien (if any); Payments of statutory rents accrued before the commencement of the contract.et.c.
- Clause M- Duty of Developer - Under this clause, the agreement also mirrors the responsibilities of the developer which may be include; complying with building approvals and permits as granted; distribution of profit as agreed; Building within agreed timeframe; building according to specification.etc.
- Clause N- Distribution and Profit Sharing: Profit is the essence of every business, as such, this clause will highlight the agreed sharing formula of the delivered units as well as Premiums to be paid (if any) and Cash balance after unit sharing.
- Clause O- Deed of Sale/3rd Party Documentation: This clause should be included in any standard JV agreement. This is because, most developers have to sell units to off-takers from the beginning of the project. This clause empowers the developer to make sure such sale in line with the head Joint Venture Agreement.
- Clause P- Facility Management/Service Charge: This clause is often a contested clause especially when the property owner retains some of the delivered units for him/herself. This Clause is mostly intended to keep the Developer on the project after delivery as a facility manager over the premises. Our solution to any debacle on this clause is to ensure that the clause includes a proviso that facility management will be further agreed under a separate Service Level Agreement.
- Clause Q- Force Majeure: This clause is very important in any contract and moreso in a Joint Venture with intent to protect parties from liabilities where same occurs by reasons beyond human control. It is however important to indicate a proviso that a force majeure must be specifically brought by the party claiming, to the notice of the other party for it to count.
- Clause R-Insurance: Usually an optional clause, albeit important. A major act that may be pleaded under force majeure may be mitigated in effect where proper insurance is in place.
- Clause S- Legal: This Clause is used to cover general provisions such as: Tax, Applicable Laws, Conveyance(Restriction if any), Use of Intellectual Property, Validity. Etc.
- Clause T- Default and Non Delivery of Construction: This Clause indicates mostly the liabilities of the Developer and compensation to the land owner where default of delivery occurs on the project.
- Clause U- General Provision: This will carry Sub-clauses on; Good faith/Non Circumvention, Detriment, Assignment of interest,Further assurances, Notices, waiver clause Etc.
- Clause V- Confidentiality: Every standard agreement should have a confidentiality clause. At Lawscope legal hub, we make always make this clause obvious on the face of the Cover page, Back page and a dedicated clause in the agreement.
- Clause W- Dispute Resolution: In any transaction, rift may occur, this is why it is key to set out the dispute resolution mechanism. We usually advise parties to settle first for mediation (due to its ease of setting up and likely hood of an amicable settling) and if push comes to shove, litigation.
- Clause X - Subsistence, Duration, and Termination: This clause details the exit strategy in the transaction. Provisos must be given on conditions of the exit.
This article has provided deep insight on what aJoint Venture Agreement entails in real estate developement. However, This may only serve as guide but does not substitute for a legal advise. On such you may contact us at www.Lawscopelegalhub.com or drop a message on our instagram page @lawscopelegalhub.
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