Property ownership, whether solely or in concert with others, is a dream held by many. Such aspirations are a nick and notch higher today than probably at any other time in the past, thanks to the ever increasing value of Real Estate in Kenya.
However, not everybody has the luxury of simply approaching a Real Estate agent and purchasing property or undertaking property development without the financial hassles or the myriad laws and regulations that stand in the way of property acquisition and development.
Accordingly, persons aspiring to make successful Real Estate investments may consider entering into a Joint Venture (JV) to acquire property. Entering into a JV may be the second best option to purchasing property as a sole proprietor. However, as noted from Justice Warsame’s comments in Santack Enterprises Limited v. Kenya Building Society Limited as reproduced above, JVs are not without problems. Proper advice, legal and otherwise ought to be sought and due diligence carried out prior to entering into a JV.
What is a JV?
A JV is an entity formed between two or more parties to undertake economic activity. In the Real Estate realm, JVs are a conduit for providing equity funding for property projects. Parties to a JV are usually referred to as Co-venturers or Venture Partners.
JVs apply to an array of Real Estate transactions. These range from mega-deals involving commercial properties, institutions, public trading companies, cross-border dealings to smaller transactions between local developers and property owners. A norm in JV transactions is that they involve intercourse between providers of capital and providers of Real Estate or Real Estate services.
At the onset of a successful JV, Co-venturers ought to ensure that all the pertinent issues, including the following are clear in their minds:-
- The scope of the JV: Co-venturers must be able to, at the least, delineate the activities and objectives the JV intends to carry out and those which it ought to refrain from doing. Three business concerns ought to be addressed in this regard:
- The JV structure ought to provide Co-venturers with appropriate risk adjusted returns if the business deal is successful;
- The JV structure ought to provide a mechanism for restructuring and salvaging the deal if things do not go as planned;
- Ensure that technical legal, tax and accounting matters do not have unexpected adverse effects on the deal.
- Existing and potential future conflicts between the Co-venturers need to be appreciated and addressed appropriately. This would facilitate agreement on such matters as non-compete issues and confidentiality obligations;
- Issues of technology and intellectual property either to be transferred to the JV or to be granted by the Co-venturers;
- Inter-corporate or individual arrangements that either will be required for the JV to operate or that are required to make the investment in the JV carry on the Business deal as envisaged by the co-venturers;;
- Due-diligence to be completed before the JV is effective so as to minimize or eliminate exposure to the co-venturers.
What Form Does the JV take?
Once Co-venturers decide to enter into a JV, there must be a formal agreement to govern the relationship between the Co-venturers and the JV entity itself. The formal Agreement entered into is called a Joint Venture Agreement (JVA). It is the JVA that brings into existence the JV entity. The JVA further sets out the formal structure in which the JV will take. The structure of the JV may be in the following forms:-
i) A company or group of companies, jointly owned by the Co-venturers;
ii) A partnership by the Co-venturers; and
iii) A contractual relationship usually governed by contract (the JVA) under which the Co-venturers would retain their assets and agree as to their separate rights and obligations.
Multiple issues come into play when deciding which JV vehicle to use. Some of these issues include legal and regulatory, tax, labour and employment, antitrust, benefits, consents and clearances to be obtained, exit strategies, banking and finance concerns, amongst others. Proper advice should be sought from competent and qualified professionals in the various fields to ensure that Co-venturers’ interests are protected.
How are the Interests of the Co-venturers in a JV to be protected?
As noted, the JVA brings into existence the JV. The JVA is key in setting out the relationship between the Co-venturers. The JVA sets out the rights, liabilities, duties and obligations of each party in the JV. It is the JVA and its ancillary documents, comprehensively and properly drawn, that enshrine clauses geared towards protection of the Co-venturers’ and other parties’ interests.
The JVA simply put, defines the ownership rights and obligations of each party to the contract. Hence, it would suffice to form and negotiate a JVA under which all parties to it are equally and effectively addressed.
In this regard, the JVA will clearly state the Parties to the JVA. It will also delve into the issues of governance and management of the JV including the management board, meetings of Co-venturers, managers’/directors’ and officers’ liability and insurance, audit process, reporting and access of information, actions requiring various consents, business plans and budget control and approval.
The JVA also addresses the business to be undertaken by the JV. In this regard, the Co-venturers will ensure the following are addressed: the core business to be undertaken by the JV, distribution of profits or losses and the formula thereof, capitalization of profits, financing of the JV by Co-venturers, Third party financing e.g. from banks, support services to be provided, intellectual property or technology to be transferred, non-compete and non-solicitation clauses, share transfer restrictions, pricing and valuations.
The JVA should also be clear on what happens if a party is in default or breaches the terms of the JVA. There should be a clear closing process so as to ensure that the rights and obligations under the JVA can be enforced. Other clauses would address: trigger events for termination and dissolution of the JVA, dispute resolution mechanisms and applicable laws and post termination covenants amongst other terms. It is therefore important to seek legal advice on these and related matters to ensure that one’s interests are protected.
Real Estate Joint Ventures may be structured in different forms. From experience, it is evident that a carefully structured legal framework definitely aids the Co-venturers work together on the basis of mutual trust, minimizes risk and exposure, and most importantly it plays a crucial role in the success of the Joint Venture. Clear provisions governing the potential risks and conflict also promotes effective and timely decision making, reduces uncertainty and helps prevent protracted delays in the functionality of the Joint Venture.