A joint venture is a business or project in which two or more companies or individuals have invested time, resources, expertise or funds, with the intention of working together. Sounds simple – but when that joint venture requires finance, it is imperative that the parties are organised and obtain expert legal advice.
In a property transaction, a lender will seek to obtain a full security package including a legal charge over the target site, a debenture over the assets of the venture, guarantees (see below), and in some cases a charge over its shares or the equitable interest of the LLP. In our experience, most lenders will not entertain changes to their standard security documents; however, it is imperative that the parties in a joint venture ensure that the security package works for everyone. As an example, a landowner that is not the borrower for the purposes of the facility will need to provide a legal charge over the site; but that legal charge should, if possible, include a limited recourse clause so that the landowner is only liable for the facility up to the value of the site.
A lender will more often than not seek one or more guarantees to support a facility, particularly when that facility is being used to fund a development project. This could take the form of a capital guarantee – that is, a guarantee to pay sums that are due from the joint venture – or may be required to cover interest shortfalls or cost overruns, the latter in particular being used if the project is a development.
If the joint venture requires so-called mezzanine or additional funding to complete the project then the issue of subordination will arise. This issue will also apply if one of the parties requires supporting security over the property to protect its position, as is commonly seen in a contractual or investment joint venture where only one party is providing funds.
The subordination of debt and security can be a contentious issue, and the deed regulating the position between the lender and other parties can be heavily negotiated. To avoid a delay in obtaining funding for the project and incurring professional fees, the parties should seek to agree sensible terms for any subordination as early on in the process as possible.
"While most lenders will not entertain changes to their standard documents the package should work for all parties"
Obtaining funding for a property transaction is complex and each lender will have different criteria. This is intensified when that transaction is a joint venture as there are more parties involved in the decision-making process. To avoid increased costs and delays, it is therefore essential that the parties in the joint venture are organised and take good-quality legal advice at an early stage.
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