Richard Page and Kate Johnson explain how to put your mind at ease with a successful private/public development joint venture
Joint ventures between the public and private sectors are gaining popularity as authorities seek to unlock the value of land while retaining control of what is developed.
In return, developers see a way to access productive relationships and work in collaboration with the landowner, avoiding the traditional adversarial nature of certain property transactions.
Property development joint ventures (JVs) between the private and public sectors can provide significant mutual benefits, but must be structured rigorously if everyone is going to get the result they desire.
European rules
In terms of the regulations governing public authorities entering into JVs, the most significant are the European Union procurement directives, which establish public procurement rules.
Public projects must comply with the regulations if the value of contracts is above specified thresholds. The regulations go by the acronym OJEU, which takes its name from the Official Journal of the European Union, in which contracts need to be advertised. However, a property development can be structured in such a way that it does not necessarily require tendering under the OJEU regulations if particular project circumstances allow this (see below).
This is generally via a land deal structure where there is no obligation or undertaking to provide works to the contracting authority. Careful consideration of structure and tendering approach is required because often landowners end up incurring massive expenditure on consultancy and tendering fees when alternative options are available.
Putting a JV together
Whatever form a JV takes, it is important to set out key issues in the legal documentation, including: the responsibilities of each partner; the source of funding; and how proceeds will be split. Importantly, the partners should also agree strategies to deal with possible issues as they arise and establish an exit strategy.
Choosing an appropriate JV structure, agreeing how decisions will be made, and putting in place clear sanctions if key goals are not met, are all important steps. But the first, and most important, step is to choose the right partner.
The partners to a JV need to have goals and partnership aims clearly identified and referenced. Timeframe aspirations need clarification and the appetite for risk (and reward) needs to be understood and allocated. Good documentation is essential, but the “chemistry” also needs to be right, so that teams will be able to work together productively.
Wigan Pier
A good example of a partnership between a local authority and a developer is the ongoing redevelopment of the area around Wigan Pier. The project is being undertaken by a partnership between Wigan Council and H20 Urban – which itself is a JV between the Canal and River Trust and specialist development partner Bloc. The Wigan Pier project aims to transform the land around the historic Leeds and Liverpool canal basin, close to Wigan town centre, with construction of a major performance venue, new canal moorings, homes and retail.
The Canal and River Trust has worked in partnership with Bloc for 20 years and H20 Urban was set up more than a decade ago to develop canal and riverside projects. The overriding aim was to bring together the drive and entrepreneurial spirit of a private sector developer with the social awareness of a charitable trust.
The JV structure created by Bloc’s asset enhancement model allows the landowner to draw on the expertise and resources of its private sector partner, enabling effective use of limited financial resources and property assets while delivering profit, regeneration and non-financial community outputs.
This delivery model allows local authorities to share in development proceeds – potentially without having to contribute equity – and retain greater control over delivery, including site aesthetics, tenant mix and social contribution.
Due diligence
Apart from the structure of the JV, there has to be a focus on the management of the relationship if everything is to progress satisfactorily.
Undertaking comprehensive due diligence on a prospective JV partner, and then on the site itself, helps limit risk of any issues coming out of the woodwork further down the line. This should include looking into its core strengths, track record, financial project plan, risk profile and governance procedures, and, most importantly, getting to know its people and ensuring they are committed to partnership and have a history that is focused on this form of delivery. The culture and interpersonal skills of the delivery partner is key, because partnership development is very different from mainstream private sector projects.
Site issues to consider include planning, environmental, heritage and other site constraints, as well as market demand, specifications, value, scheme use, cost and exit strategy.
Funding strategy is a key aspect that has to be explored before signing any JV deal. Specifically, what are the financial inputs to planning and who will pay for them? And how will the development be funded and when do both partners expect to make a profit? The project funding plan is the key area for financial due diligence and too often consultants overly focus on a snapshot of the potential partner’s net asset value or turnover as a comfort blanket for decision-making. The real focus needs to be project viability and what cash the partner is prepared to commit to the project, rather than how much they may have in the bank.
Happy endings
Finally, thought must be given to what happens when it is time for JV partners to go their separate ways. Ideally, completion of the scheme will signal an exit, but – unhappily – it could also occur part-way through if deadlines are missed or strategic decisions cannot be agreed by the partners.
In this situation, the remedies are varied and depend on the size of the issue at hand. Options range from the joint venture lapsing to one party buying the other out. Each exit needs to be carefully considered when the venture is set up, so that it is agreed in advance what course to take.
If all these procedures are adhered to, then the JV partners should leave the venture with their strategic goals realised – and positive memories of a productive partnership.
Richard Page is a co-founder and chief executive of Bloc
OJEU rules explained
OJEU rules regulate the purchasing by public sector bodies and certain utility sector bodies of contracts for goods, works, services or supplies (public works contracts). Public projects must comply with the regulations if the value of contracts is above specified thresholds.
The key differentiation under OJEU rules is that a local authority entering into a JV for purely investment purposes does not constitute a procurement of a relevant public works contract. If an authority wants to avoid the requirements of the Public Contract Regulations 2006 (“the regulations”) imposed by OJEU, the following points should be noted:
• A pure “land deal” is excluded from the rules unless it is coupled with an obligation or undertaking to provide works or services of economic benefit to a contracting authority. Therefore, a lack of a legally enforceable obligation on the developer to carry out works specified by the contracting authority will avoid the regulations. It is also worth noting that the imposition of planning obligations by a local authority will not confer a public works contract under the regulations.
• Even if the sale or lease agreement includes desirable development objectives, or a buy-back option in the event of such objectives not being met, it will still not be a public works contract under the regulations.
While this means that the local authority must be willing to relinquish a degree of control, in the sense that it does not have specifically enforceable development obligations against a developer, its usual statutory planning powers are not prejudiced and it retains any control it may have had over the design of the project by these planning controls.
It is vital to ensure that any assessment of whether or not a development agreement or “land deal” falls outside the definition of a public works contract – and requires no OJEU process – is correct, because there is a risk that any contract in default of the regulations could be set aside and/or damages awarded against the procuring authority in favour of affected third parties. A partner and team with direct experience of this process is therefore highly recommended.
Kate Johnson is a solicitor at Gordons
