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.
One of the fundamental issues for a lender in providing a loan facility to a joint venture is the structure of that venture, as this will determine the terms of the loan and the extent of the security required. In property transactions there are two common types of joint venture, both of which have advantages and disadvantages from a funding perspective.
Once the type of joint venture has been determined, the parties will need to agree the key terms of the deed that regulates it; these will be set out in a shareholders’ agreement, partnership agreement or a separate joint venture agreement depending on the type of arrangement. The terms of a joint venture agreement are pertinent in a lending situation, as the parties will need to avoid conflicting with the lender’s requirements. While each transaction will need to be considered on a case-by-case basis, there are two fundamental issues that must be considered in the joint venture agreement.
The loan facility will set out the terms on which the funding will be provided. Such a facility can be a complex document, and the joint venture must consider all aspects carefully; while many of the terms will not depend on the fact that the loan is being made to a joint venture, there are certain terms that may be fundamental to a lender where one is involved.
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.
It is essential that the parties in a joint venture agree how to deal with guarantees at an early stage, and may want to consider the following.
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.
The key aspects to agree on are:
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.
Matthew Grogan is a partner and property finance specialist at Thomson Snell & Passmore LLP firstname.lastname@example.org
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