Do I need a Contract to make Joint Ventures work?
This week I had an interesting question pitched to me in three parts from a fellow investor.
Can I recommend a solicitor who can write a contract giving the lender of the finance some security/confidence that I won’t run away with the money?
First of all, many solicitors will be able to provide a contract of this kind, but it will come at a price! The last time I had a JV contract drawn up by a solicitor it actually cost quite a lot of money for a document that comprised of around twenty pages. However only two of the pages of my contract were actually specific to the deal, the remaining eighteen or so pages consisted of “copy-and-pasted” standard terms and conditions that didn’t relate to the deal. This is something very likely the solicitor has saved on their PC for a quick addition to the contract but it is nevertheless something you will be paying for on the final bill!
It might be the case that a simple written agreement between yourselves, independent witnessed, may suffice. One factor that will really dictate whether you need a professionally drawn-up contract will be the amount you are borrowing from the lender. When you are looking at legal bills for the contract in the region of hundreds of pounds, it will not necessarily seem like a clever move on a deal that just nets you a £5,000 investment from the lender. On the other hand, if you are looking at borrowing £1,000,000- a dependable contract, ratified by a solicitor, between the parties may suddenly look a lot more attractive!
Another possible advantage of using a contract would be that if there were any errors in the contract you would be able to claim against the solicitor’s personal indemnity. Now as your deal will likely involve generic terms that are well understood by yourself and your JV partner, you may question whether this advantage will be worth the fees but every deal is different and one deal may have complications that another won’t have.
So ultimately, no I can’t recommend a solicitor for a JV contract as I don’t use one! But I’m sure that if you ask around on Property Groups online, in forums and social media groups, you will find a few.
Does the lender need a floating charge on the property in a JV partnership?
There are a lot of answers for this question, which ultimately boil back down to the scale of the deal with your JV partner.
To preface the above and possibly save a lot of work, if your JV partner is not bothered by the charge or not bringing the idea to the table then I will say keep it simple. It can be a lot of work to set-up a floating charge on a deal which, if your partner is the lender, then they will have to keep in mind that the bank will want First Charge on any of their involvement in the deal, so your partner will be coming second (as a Second Charge).
A better alternative to being second charge could be a restriction. What a restriction does is very straight forward. A Restriction restricts the owner of the property from doing anything without your consent. Crucially a restriction will stop the owner of a property from reselling or refinancing which from our point of view as JV partners and Property Investors, is normally enough. This may give your lender the confidence that you cannot simply run away with their money!
A big difference between the Restriction and a Charge is that the Charge-holder has a right to possess the property if it all went horribly wrong- hence you would have to really think about the level of charge needed when applying a Floating Charge to any JV deal. There are only a few instances where your partner or yourself will want to repossess a property before exhausting all the countless other options- the deal will have to have gone really sour!
Is there a standard template for Joint Venture Contracts?
Not really! Now although a solicitor or yourself can very quickly write up a few paragraphs to cover the simplest written agreement with your JV partner… any written agreement will ultimately have to be bespoke.
Simple things such as the names and addresses of the parties involved, the size and duration of the loan, the interest rate and so on, will be easy to plug into a JV contract and/or the agreements between you- but a really good contract or written agreement between JV partners will cover what is important to each of you! This is what makes the contract bespoke and why I can’t recommend a standard template. It really is a case of sitting down with your JV partner and discussing the various “what if” scenarios such as:
- What if you can’t repay the loan (Or the discussing the mechanism you will put in place to cover this).
- What if your partner wants to get out of the agreement earlier?
- What if you need to sell earlier than anticipated?
- What if you fall out with your JV partner? (It happens!)
In short, JV Contracts are not a one-size-fits-all kind of agreement because of the bespoke nature of this type of work. I would advise you to be highly suspect of any contract-writer or Solicitor who says they can provide a template for JV contracts that works in all cases.
Finally thanks to James for the question. Please keep your questions coming in.
Here’s to successful property investing!
Peter Jones B.Sc FRICS
Chartered Surveyor, author and property investor
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