The JV project costs and capital contribution should take into consideration the possibility of disruption and rampant inflation. Inflation and supply chain disruption can derail a JV. This provides the Landowner with concrete proof that the Developer has the financial prowess to cross the finish line and in the same vein offers transparency with respect to project expenses. Invariably a Developer in a JV owes the Landowner a duty not to make secret profits, the full disclosure of conflicts of interests, and to exercise appropriate degree of skill and care.Ībsent a high degree of trust between the parties, it is far prudent, in practice, for the capital contribution of the project to be housed in a joint account held by the Landowner and Developer. However, the structure and implementation of most JV agreements, often give rise to fiduciary duties on the part of the developer. Commercial transactions conducted at arms-length generally do not give rise to fiduciary relationships. Ideally, the JV agreement should be prepared by a lawyer with keen attention to detail, as it minimizes costly potential fall-outs from badly couched provisions.Ī Fiduciary duty is a legal obligation for one party to act in the best interest of another. This re-emphasizes the need to avoid error-strewn cut and paste agreements, particularly for the party with the most skin in the game. There are equally tax advantages, as the SPV may obtain a 5-year tax holiday under the ‘Pioneer Status’ tax incentive.Ĭontra Proferentem is a rule of contract interpretation which provides that an ambiguous contract term should be construed against the drafter of the contract. A good example is limited liability - an SPV allows the developer to ring-fence any potential liability that may arise from the JV. Big ticket projects usually have meatier provisions on waterfall distribution, deadlock resolution, drag-along rights, third-party loans, and interest transfers and exit strategies.įor real estate developers involved in multiple developments and big-ticket transactions, there are practical advantages for setting up a Special Purpose Vehicle (SPV) for each JV. A JV agreement for a small project, ideally, should contain terms on capital contribution, management and decision making, delivery timeline, off-takers, default and termination, profit sharing, and dispute resolution. What you find sometimes in practice are cut and paste agreements strewn with errors. The JV agreement should be drafted by a lawyer and accurately reflect the intentions of the parties. Due diligence can also extend to obtaining credit reports on the relevant parties and searching court registries for existing litigations. Where corporate vehicles are used, a search on possible charges on the company assets, and the antecedents of individuals behind the veil should be conducted. Likewise, the developer should exhibit concrete financial capacity and business acumen (their track record is a good guide) to see the project to completion. The landowner’s title must be vetted to ensure there are no fatal encumbrances. There are a number of key legal and practical issues to consider with respect to real estate joint ventures as follows:ĭue diligence is a no-brainer. The most common example usually involves a land owner, who provides the land, and the property developer, as the project financier. A JV is a business arrangement where 2 (two) or more entities pull resources together to accomplish a real estate project. Joint ventures (JV) have become prominent in real estate developments in recent times in Nigeria.
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