Structuring Joint Ventures. Legal Pitfalls and Possibilities.
Have you reached the end of your purchase power but still want to own more Real Estate? One option to keep the asset train running is to consider a joint venture. So what does this mean? Difinitively put, "An association of persons for the purpose of a particular commercial undertaking with a view to mutual profit with each participant usually, but not necessarily, contributing money, property or skill."* A Joint Venture Agreement ( “JVA”) creates a legal entity through a contract, and identifies the major rights, duties, liabilities and obligation of each participant in the joint venture. More simply put - a joint venture is finding other like-minded investors to work with. This could be the most beneficial to all.
One of the advantages of a joint venture is that each of it’s members maintains a distinct legal entity from the others and each will only be held responsible for it’s own personal errors against third parties. Each member of the joint venture retains ownership of his or her property.
What is expected of the join venture partners? A group of people pooling together their resources can bring different contributions to the table. Perhaps you have the cash for a down payment but are at the top of your debt to service ratio. Finding other partners can allow you to use their under realized potential to help qualify your party to own more investment properties. Another contribution could be sweat equity. If one or more party members don't have the time to tend to the investment another member could add their time and energy to renovate or manage the unit.
As good as it sounds, lets take a moment to look at some of the concerns one may need to consider. While an oral agreement is technically binding by law, it can be hard to prove if there is a dispute between party members. This is why it's important to have a written agreement drawn up for all involved, it should be done or at least reviewed by an independent lawyer for each member. Without a written agreement in place - a judge could strike the agreement if there is a dispute. Also there should be a mechanism in place in case there is a dispute between members about where and with what medium the contract will be arbitrated (court, mediation etc.)
The joint venture agreement remains in effect until the property is sold and profits have been disbursed. All parties must give consent to sell it. One point of contention could be the sale price of the home. Since there will likely only be one party member on the title of the mortgage, a valuation must be put on the property prior to sale. A third party appraiser should be brought in, and having a couple of different appraisers may be desired at this point.
So, now what if you want to buy another property without the group? You are free to pursue other ventures or interests. Your only limitation would be those governed by the the lenders and their debt to service ratio cap and your own willingness to assume risk and extra commitment.
If you take the time to make sure the agreement is well written, a harmonious and mutually beneficial experience can be had by all with joint ventures should this be an option you might choose to consider to grow your asset portfolio.
* Thompson v. White(2006) NSWA 350 - NSW Court of Appeal
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