Many developers will be familiar with the concept of “golden brick” contracts, where the sale is completed when the construction of new dwellings being built on land has reached the stage that allows the transaction to be zero rated for VAT purposes.
We have been dealing with a large number of property joint ventures recently. Such joint ventures typically involve two organisations forming a new company or limited liability partnership (“LLP”).
The new entity will buy and develop land, often using funding provided by the joint venture partners.
The joint venture entity will appoint a contractor to construct and sell the development. This work is often contracted to one of the joint venture partners, where such partner is a developer in its own right.
Such joint ventures have a number of advantages. They allow the parties to share the risk and reward. They also allow parties to bring together skills and assets. For example, one party may have land and/or money but limited development expertise, whereas the other may have less available money but more development expertise. A joint venture will bring the parties together and allow them both to benefit.
Limited Company or Limited Liability Partnership?
The parties will need to decide on the legal form of the joint venture entity. The new joint venture entity will usually either be a limited company or an LLP.
The type of vehicle to be used will depend on a number of factors, many of them tax-related.
The important thing to bear in mind is that it is often difficult to change from a limited company to an LLP (or vice versa) once the joint venture has been set up. This can often involve complicated legal documentation and detailed tax and accountancy advice.
Professional Legal Advice
The parties should take advice at an early stage to try and ensure that they use the right type of joint venture body; this can save significant time and trouble later.
This will not always prevent the parties from needing to make a change. We have recently been dealing with some joint ventures where a change was required as a result of a change of circumstances (or a change in the identity of one of the joint venture parties). This change could not have been avoided. However, we have also dealt with some circumstances where changes were required due to the parties not having taken appropriate advice at an early stage.
For more information please contact the Property Joint Ventures team.