Joint ventures have long been seen as a popular strategy for investment in real estate development across all sectors, with the sharing of risk and access to fresh ideas being just a couple of many potential upsides. Below are five key considerations for the parties to these combinations:

1. Minority shareholder protections

Any shareholders' agreement needs carefully drafted voting provisions which strike a fine balance between preventing a difficult minority investor from frustrating a business and ensuring an oppressive majority shareholder does not subject the other shareholders to unfair conduct. A minority investor has certain protections provided by law such as the right to prevent the passing of certain resolutions (e.g. a 25.1% shareholder can block a special resolution) and the right to bring a claim for unfairly prejudicial conduct.

In UK companies, due to the statutory duties imposed on directors to act in the best interests of the company, it is common to see various reserved matters decided at shareholder level. There can be different thresholds of approval needed for different categories of decision e.g. greater than 50%, 75% or 100% of shares in issue. The higher the percentage, the more care is required to ensure that veto rights, and therefore undue influence, are not given to minority investors.

A common misconception is that a minority shareholder with a veto right can act in any way regardless. In certain exceptional circumstances, the court will restrain a vote in a particular manner if it would be detrimental to a creditor's interest. Also, the majority shareholder(s) may seek relief under section 994 of the Companies Act 2006 on the basis that the conduct of the minority shareholder is unfairly prejudicial to the interests.

2. Reserved matters and business plan

Often the heaviest negotiated part of a joint venture agreement are the reserved matters. For a developer, it is key to ensure that the situations in which these arise are limited. This can be achieved by linking approvals to an approved business plan. The relevant reserved matter should not require further approval at shareholder level to the extent (i) it has been approved in the business plan or a development or (ii) it relates to an obligation of the group under a transaction document or an agreement approved in accordance with the joint venture agreement. When coupled with a development agreement drafted with sufficient flexibility for the manager, this should ensure that the developer only need come back to the company/joint venture partner for approvals in limited circumstances.

3. Exit rights in solicited offer scenario

A joint venture party may seek its own exit mechanic in addition to any mutual right to sell interests after a certain trigger event or date. This could arise, say, five years after the joint venture is signed or two years after practical completion of a project. If so, the non-initiating party should negotiate the right to acquire interest being sold for a price not less than and on no less favourable terms than those offered to a third party. The non-initiating party should have 30 business days to respond as to whether it wants to accept the offer. If the offer is rejected, then the initiating party can move ahead with the sale to a third party that made an offer to it, with the sale being completed at a price not less than, say, 96% of that offered to the non-initiating party in the case of an unsolicited offer and 94% of that offered to the non-initiating party in the case of a solicited offer.

4. Default

Developers should beware of cross-default provisions in the joint venture agreement triggered by a default under a development agreement. Often a "for cause" removal as development manager will result in a forced sale situation at a discount for the related investment entity. It is important to limit the situation where such a draconian consequence applies. Within the management agreement, a "key person event" leading to "for cause" removal should apply only for offences where the custodial sentence is not less than six months. The development manager should insist on the ability to remedy breaches and, where the material breach is the responsibility of a single person, it should have the ability to "make the joint venture whole", remove the offending employee and consequently proceed with the joint venture. Also, it should provide for a hurdle that the act or breach has had a material adverse effect on the joint venture as a whole for the termination right to arise.

5. Funding

There should always be a cap on the amount an investor is obliged to invest in a joint venture. To the extent further funding is needed, there should be the ability for that to be satisfied by way of a loan. If a party wishes to fund such amount, it should be entitled to make a shortfall loan, which will attract a higher rate of interest and be repaid ahead of other sums in the waterfall. Only where a partner has committed to provide funding and subsequently fails to honour such commitment should mechanisms diluting equity percentages apply.