Joint Venture Development of Property in Kenya

Joint Venture Development of Property in Kenya

The prices of property in major cities and especially in Nairobi and Mombasa have sky-rocked in the last few years.  Besides, the cost of borrowing has been generally been high and at most unpredictable. Taking these factors and others into consideration, it is becoming increasingly difficult for both land owners and property developers in develop or implement real estate projects. For instances, in light of high land prices, a developer who chooses to buy land may not be left with adequate resources to develop it after the purchase. For land owners, lack of  affordable capital is a great hindrance to property development.

To bridge this gap, it is advisable for land owners and owner of capital or real estate developers to come together and devise ways of polling their respective resources together in order to achieve meaningful results. Indeed, it the recent development in anything to go by, the future of real estate development is in joint venture real estate projects.   For real estate joint ventures to work, it is important to consider salient features of such an arrangement and get a good lawyer to prepare relevent documents which will protect the parties' interest and address their concerns.

For a land owner, the greatest challange is lack of technical know-how on how to negotiate a good deal.  Besides, many a land owners may not have witnessed such arrangement in the past. Other fears to be conned by unscruplous developers.  Moreover, they is a danger that the developer may not keep part of his bargain after the commencement of the project and thus exposing the land owner to financial loss and unnecessary disputes.

For a real estate developer, his major concern is to ensure that he gets a good title on which he canbimplement the project and recoup his value with minumum risk.  A real estate developers in also interested to have some liberties like being able to advertise the proposed project and make 0ff-plan sales. Moreover, upon commencement of the project implementation of the project, the developers want to be sure that he can start selling the units and implement the project without unnecessary interferances from the land owner.

In light of the foregoing factors, a good joint venture agreement that caters for and adequatelyaddresses parties interests and concerns cannot be gainsaid.  A good joint venture agreement, should at a minumum address the folllowing factors, amongst others:-

1. Tranfer of land to the development company- If the title to the land is in the name of an individual, it is prefarable for it to be transferred to a development company. This the vehicle through which the project will be implemented.  Initially, such company should only be formed with the land owner and his family member(s) as the first  shareholders and directors. The real estate developer should only be incorporated into the company after he has invested some funds into the project.
2. Share capital of the development company and management issues- The initial share capital of the companyu is determined by the value of the land as determined by the project valuer. This is normally the market value of the land.  This value belongs to the land owner alone.  The project quantity surveyor should then try to quantify the full costs of proposed project. This portion of the share capital should be allocated to the real estate developer at various phases of the project implementation milestones. 
3. The change of user and development approvals- The parties should ensure that the change of user of the property is processed by the relevent local authority and the lands office. Moreover, requisite environmental and development permits and permissions should be processed.  The types of permits or approvals to be procured is dependant upon the type of development intended to be implemented by the parties.
4. Selection of the requisite consultants- It is advisable for the parties to agree on the relevent consultants to be involved in the projects. These consultants should include the project architect, the project contractors, the quantity surveyors, the structural engineer, the project surveyor, the project physical planner, the project valuers, project accountant and the project lawyer.  The party to bear the consultants' fees and the contracting terms of each consultants, amongst others, should also be agreed upon.
5. The Types of project and quality of finishings- Preferably, since both parties are equally interested in the type of the project to be implemented on the property, they should jointly agree on this with the help on the project achitect. This will also be influenced by the zoning regulations, the permitted user of the land and the costs implications. The agreed and approved project plans should be registered at the lands office, and copy attached to the JV agreement. Besides, the parties should agree on the qualities of the finishing and these can be attached in a schedule to the agreement.
6. Project milestones and timetable- The parties should agree on various timelines including the hiring of consultants,  the ground breaking date, the construction phase and expected project completion date. The project manager, the project achitect and the contractors can assist the parties to come up with practical timelines.
7. The roles and obligations of the parties - The respective roles and obligations of the parties should be set out in the  joint venture agreement and consequences of default or breach also defined.
8.  Shareholders' Agreement- The parties need to agree on the project management issues in the development  company, and should preferably execute some form of a shareholders' agreement. Amongst other things, such a shareholders' agreement should cover issues like, the company chairpeson, directors and the management structure, the decision making fora and rights, meetings, reserved matters which require unanimity or special majority vote, the dividend policy, keeping of books of account and audit and disputes resolution mechanisms.   Such an agreement should also provide for pre-emption rights on transfer of shares and methodology of admission of new shareholders (if a need arises).
9. The sharing of the project value or profits- The parties may agree on sharing of profits after catering for all project costs including the costs of land which is refunded to the land owner or share the units developed proportionate to their respective contributions or as may be agreed. 
10. Decision Making and Parties Representatives-The parties should agree of the modes of making decions concerning their joint venture projects. The day-to-day management issues can be delegated to the project manager or architect assisted by at least two representatives; one from the developers and the other from the land owner. Major decisions can be taken in stakeholders monthly or quaterly review meetings.
11. Project financing-In some joint venture arrangements, the developer is able to finance the costs of the development on his own or from off-plan sales. This might be from savings or external financing. Some developers may also seek to borrow funds from commercial banks and other financial institutions using the land owner's property as collateral.  In the latter case, this should be agreed upon between the parties since it exposes the property to attachment or forced sale in the event of project failure or lack of cashflow to finance the loan repayment. should be able to raise capital to implement the project.
12. Force Majeure-  These are unforseen factors or circumstances, ansd normally outside the control of either party, which might affect the implementation of the project or delay its completion.  The VJ agreement should anticipate and make provision for force majeure events.
13. Breach, termination and dispute resolution- The JV agreement should cover the consequences of breach by either parties, consequences of breach ,  the grounds of termination (if any), and mode of resolution of disputes.  It is also important to provide that parties would be at liberty to invite additional investors in the event of lack resources to complete the project on their own.
14. Taxation- Lack of compliance with the tax laws can expose the parties to huge financial penalties which might wipe out expected profits or value of the project.  Thus, parties should comply with the tax requirements including payment of withholding tax on consultants fees as well as corporate tax on profits.
15. Insurance - to mitigate against various risks, the parties should ensure that the project is insured at all times during the project implementation phase.Sales and Marketing- In order to realize their gains, the parties should come up witn an elaborate marketing plan for their projects. The should also appoint the project selling agents who will be involved on the sale of the developed units.  The project lawyers should also be able to prepare requisite sale agreements and other documentation and handle the stamping and registration formalities in a timely manner.

Note: This is just a summary of some of the issues to be considered when dealing with joint venture project involving real estate development. It does not in any way obviated the need to seek specific legal advice.  If you require further information or legal advice on  joint ventures covered in this write-up, please do not hesitate to contact the writer on mainacy@gmail.com

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