As the Local Government Association (LGA) calls for a blurring of boundaries between national and local government when considering spending decisions, the trend towards merged or shared public entities seems on the rise. This is certainly the case when it comes to joint ventures.
Joint ventures are increasingly used by local authorities working with housing associations or property developers now that the Localism Act permits local authorities to use their general powers for commercial purposes – provided the activity was permitted in any event and they act through a company.
The right joint venture allows an authority to draw on the expertise and resources of a joint venture partner, enabling the more effective use of limited financial resources and/or property assets while accessing essential expertise without upfront costs.
Often local authorities have land or tired housing stock, a housing association has access to funds and a need for housing, and a developer has expertise and a skilled workforce. A permissive legislative framework, political appetite for private sector engagement in traditionally public sector activities, the acute need for cheaper housing and the reality of financial pressures in the public sector combined to put joint ventures in a positive light.
But is a joint venture always a coming together of these parties to pool resources and share risks, and is it too good to be true? Setting up a joint venture and getting it right can be a costly exercise. By definition it also involves sharing out the benefits generated by a project so each party gets a smaller slice of the pie.
A search of the law reports for cases involving joint ventures quickly reveals they can result in costly litigation too. Most joint ventures involve parties with partially overlapping interests – when their other interests come to the fore, difficulties often arise. Difficulties also arise where projects have to be changed or are aborted after expenditure is incurred.
The use of limited liability companies or LLPs as a joint venture vehicle can give the protection of limited liability to third parties, which is very attractive. However, there are still areas of potential concern.
Who holds any property or capital – whether provided or raised by any of the joint venture partners – becomes a crucial issue if third party claims arise, and any assets passed to the joint venture vehicle are potentially vulnerable to those claims. If the structure adopted means the joint venture vehicle has no assets, third parties may well require guarantees from the joint venture partners. Guarantees undermine the limited liability protection and so the partners must consider how any guarantor liability will be shared, even if only one partner is pursued. If risks are to be genuinely shared, consideration must also be given to the claims between joint venture partners since disputes often arise about matters such as the fees a partner can charge for the project.
Another concern is the distinction between a contract with the individual or with their corporate vehicle. If an individual’s input is crucial, a contract with their company may be insufficient. A contract with the company to procure the involvement of the individual or with the individual themselves will not guarantee their engagement; contracts for personal services are rarely enforced by the courts.
However, providing for the individual’s engagement and a financial consequence of non-engagement in the joint venture agreement will usually have the desired result and if not, result in compensation.
A local authority entering a joint venture agreement should be clear about (and ensure their documentation reflects):
• Who the necessary partners are.
• Whose participation is required and the consequences of any failure to participate for the partners and the project.
• What liability (if any) the local authority has to third parties directly.
• What liability (if any) to third parties the joint venture is taking on indirectly through guarantees or otherwise.
• What assets or resources pass to any joint venture vehicle, how they are held and whether they are available to satisfy the joint venture vehicles’ liabilities.
• What liabilities directly or otherwise, its partner has to third parties.
• What contribution either partner is entitled to against the other in the event it incurs a liability to third parties.
• What liability either partner has to the other for contributions incurred in the event the project is aborted.
• What anticipated activities are actually legal obligations to do anything (with a consequent liability for breach) are.
• What legal obligations its joint venture partner is taking on (with a consequent liability to the authority for failing to perform).
• What power either joint venture partner has to change the nature of the project and what any necessary adjustments to the arrangements between them will be or how they will be decided upon.
Brie Stevens-Hoare is a barrister at Hardwicke Chambers.
