March 26, 2020

COVID-19 UK: Real estate update - Key issues to consider for property development JVs

Inevitably in the current circumstances participants – sponsors, investors and development managers - in property development joint ventures are focused on critical operational matters which are moving exceptionally rapidly. In some cases – such as where a development project is under construction - decisions are being taken hourly in response to emergency situations. In others – such as where planning has yet to be obtained - the impact may be less immediate, but no less fundamental for the business plan of the joint venture.

In these circumstances, there are risks that decisions may be taken without due process – however, hindsight is 20-20 and actions taken in haste now could be looked at less generously in the future. This entails risks on all sides, particularly in worst case scenarios where parties may have no choice but to look at their strict contractual rights. It is also inevitable that in some cases, JV partners will have bona fide but fundamental differences of opinion as to the best way forward.

It is entirely possible for parties to manage these risks by ensuring compliance with the existing agreements. Where these are not workable in the circumstances, parties may take steps such as agreeing emergency decision making protocols and delegated authorities, and discussing in advance how they might handle a good faith strategic disagreement. Doing so will establish a sound commercial footing for current activity, preserve a good working relationship between the parties and minimise the risks of disputes further down the line.

This note therefore asks, in short form, a number of questions which are intended to prompt our clients to consider issues which are important but which may not currently be front of mind. 

Issues relating to construction contracts, landlord and tenant issues or considerations relating to loan facilities are not covered in this note, please see the detailed briefing notes on these subjects by following the links below:

  1. Projects & Construction UK and COVID-19: Managing the impact of Coronavirus
  2. COVID-19 and loan facilities: Update for corporate borrowers during the Coronavirus outbreak
  3. COVID-19: Update for landlord and tenant

Joint venture / shareholders' agreement

  • Parties:
    • Have both/either party used a project specific SPV to enter into the JV?
    • If either party has used a larger group company, insolvency events of default will be of particular interest (see below).
    • If SPVs, have either party given PCGs, and if so what are the terms?
  • Business plan:
    • Is there a requirement to revisit the business plan?
    • What if parties disagree? >>> See deadlock below
  • Funding:
    • Obligations on parties to provide funding:
      • What funding is committed? 
      • Does a drawdown require a unanimous board decision? >>> See deadlock below
  • Actual provision of funding
    • What if parties disagree over funding requirements or calls for funding? >>> See deadlock below
    • What if a party defaults on committed funding? >>> default
    • What if funding is required but only one party is prepared to fund?
    • Shortfall/excess funding regimes
      • • Cure loans
      • • Catch up loans
  • Decision making:
    • What potentially relevant decisions are upcoming?
    • Can they be made by directors or are they reserved for shareholders?
    • Is unanimous consent required (or are they reserved/major matters)?
    • What happens if the parties disagree on a reserved/major matter? >>> See deadlock below
    • How does the JV instruct the DM, provide approvals, request additional services and other interface matters?
    • Are any conflict matters relevant?
  • Deadlock:
    • Exactly what constitutes a deadlock?
    • What is the process for resolving a deadlock which arises?
    • What are the consequences of an unresolved deadlock?
    • If there is a buyout process, is it linked to market value and if so how is market value determined? Note that determining market valuation at present may be particularly difficult.
  • Default:
    • Is there any insolvency event of default, and if so what precisely does it mean?
    • What other events of default exist which one or other party might seek to invoke?
    • Are there any cross default provisions to the DMA?
    • What are the consequences of an event of default?
    • What remedy periods or other mitigations exist?
    • If there is a buyout process:
      • Is it linked to market value and if so how is market value determined?
      • Is a discount applied to market value for (a) insolvency (and if so consider enforceability), or (b) other EoDs?
  • Dispute resolution:
    • Are there any bespoke dispute resolution provisions in the agreement?
    • If so, what is the potential impact on any issues raised above?

Development management agreements

  • Services:
  • Business plan:
    • Is the DM obliged to keep the business plan under review and propose suitable amendments if circumstances require?
    • Does the DM have to consent to any revised business plan?
    • To what extent is the DM obliged to continue providing services where the business plan is changed?
  • Decision making process, instructions and delegated authority:
    • What delegated authority does the DM have, and how is this documented?
    • What processes does the DM need to follow to obtain instructions?
    • What happens if the DM does not receive clear / adequate instructions?
  • Suspension:
    • Does the employer have the right to suspend the DMA for a period of time? (If not, you may wish to consider how to approach such discussions if initiated by the other party)
    • If so, on what basis, for how long and with what impact on fees?
  • Termination:
    • Are there any existing issues / defaults (technical or otherwise) that could be used to seek to terminate the DMA, or used as leverage for a renegotiation?
    • Is there a no-fault termination provision?
    • What are the details of the insolvency termination provisions?
    • In what other circumstances can parties terminate the DMA?
  • Force majeure:
    • Is there a force majeure clause, and if so what is its effect?
  • Fees:
    • On what basis are the fees calculated and paid?
    • Does any change in project activity have an unexpected effect on the fee levels (eg where a fee is based on monthly actual development costs)?
    • What rights does the DM have if fees or disbursements are unpaid?
  • Dispute resolution:
    • Are there any bespoke dispute resolution provisions in the agreement?
    • If so, what is the potential impact on any issues raised above?

Shareholder loan agreements

  • Are there standalone shareholder loan agreements?
  • What events of default exist, with particular focus on insolvency?
  • If there is an insolvency EoD, what are the precise triggers?
  • Confirm that shareholder loans are only repayable in accordance with the JV/shareholders' agreement (not on demand).
  • What is the impact of an EoD?