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15 November 2017 / article

Tips and tricks for investing in real estate joint ventures

An increasing number of real estate investments in today’s market are made by joint-ventures (“JV’s”), which gives rise to a number of recurring challenges.

1. Organization: partnership or company

JV’s can be structured as “partnerships” (i.e. on a purely contractual basis) or through joint-venture companies, who have a separate legal personality. While the use of partnerships is certainly not uncommon in large development projects, most joint-ventures in real estate investments are structured through joint-venture companies.

The type of company used for the joint-venture will depend on a variety of legal, regulatory and tax considerations. In Belgium, the limited liability company (“naamloze vennootschap” / “société anonyme”) is most often used. For tax purposes, investors may prefer the private limiated liability company (“besloten vennootschap met beperkte aansprakelijkheid” / “société privée à responsabilité limitée”) or the ordinary partnership with legal personality (“gewone commanditaire vennootschap” / “société en commandite simple”).

2. Stability of the JV versus exit possibilities for JV members

A key-concern for most JV’s is finding the right balance between securing the stability of the JV and offering a realistic exit possibility to the JV members.

The stability of the JV is typically secured through (i) restrictions on the transferability of the shares of the JV company and (ii) change of control clauses (triggered by the change of control over one or more of the JV members). Both types of clauses are, in principle, valid under Belgian law but, depending on the corporate form chosen for the JV, statutory limitations may apply. In order for share transfer restrictions to be effective towards third parties (such as the purchaser of the shares), it is advisable to include the share transfer restrictions in the articles of association of the JV (and not only in the JV Agreement itself).

JV members nevertheless often want to include one or more exit mechanisms in the JV Agreement in order to compensate for the “illiquidity” of their investment. Again, Belgian law offers a variety of mechanisms, based on the contractual freedom of the parties, the most often used being: 

  • “joint exit clauses” such as (i) drag along rights, (ii) tag along rights, (iii) “trade sale” and/or “IPO” clauses (whereby JV partners undertake to co-operate in order to sell the JV to a third party or list it on a stock exchange);
  • “put and call options” whereby one or more JV partners have the right to acquire the shares of other JV partners (call option) or the obligation to acquire the shares of other JV partners, if requested by the latter (put option). Two legal technical issues must be kept in mind when negotiating and drafting this type of options: 
  • the exercise price of the option must be determined or determinable in order for the option to be valid. This means that the JV agreement must either provide for a fixed exercise price or must contain all elements on the basis of which the exercise price will be calculated (without any further negotiations between the parties being required). Alternatively, the JV partners may also decide to appoint an independent third party/expert to determine the exercise price.

  • the option may not violate Article 32 of the Belgian Companies Code, according to which no shareholder may be (i) excluded from participating in the company’s profits nor (ii) exempt from exposure to the company’s losses. This provision has created legal uncertainty with respect to the validity of put options, allowing a shareholder to sell its shares at a price at least equal to the initial acquisition price paid for those shares. Although the Belgian Supreme Court seems to have accepted the validity of this type of options(provided they are in the corporate interest of the company), this legal provision still creates legal uncertainty.

3. Governance of the JV

JV agreements typically provide for detailed  governance provisions: allocation of decision power, composition of the board, (qualified) majority requirements,… In practice, the governance model will depend on (i) the structure of the JV (50/50 or majority / minority) and (ii) the corporate form of the JV. From a Belgian legal perspective, it is important to keep the following in mind:

  • voting arrangements between shareholders are valid provided they are (i) limited in time and (ii) are, at all times, justified by the JV’s corporate interest; and
  • voting arrangements at the level of the JV’s board of directors are not valid.

As part of these governance discussions, JV partners often negotiate (or at least consider) including) a “deadlock mechanism” in their JV Agreement. Based on the freedom of contract, Belgian law offers a variety of “deadlock mechanisms”, ranging from the referral of a matter to a third party over put- and call options to the sale or liquidation of the JV in case of a deadlock.

4. Distribution and allocation of profits

Belgian law offers a large freedom to JV partners to make contractual arrangements on profit allocation and distribution.

Some statutory restrictions do exist on (i) the distributable amounts, (ii) the timing of the distribution(s) and (iii) the allocation of profits between the shareholders (see the above mentioned Article 32 of the Belgian Companies Code). In addition to these statutory limitations, it should be kept in mind that any decision on distribution of profits to JV partners must be justifiable in the corporate interest of the JV.

5. Duration of the JV Agreement

In Belgian practice, a time limitation is typically applied to the entire JV Agreement. This can be explained by the fact that, under general Belgian civil law, each party may, at any time, terminate agreements for an undetermined duration “with reasonable notice”. In order to avoid uncertainty on the duration of their JV agreement, parties  therefore usually opt to provide for a specific term for the JV agreement as a whole. In practice, most JV agreements under Belgian law are entered into for a term between 5 and 10 years.

 



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