1.  Introduction

This article provides an overview of the most common property joint venture structures and their respective advantages and disadvantages, as well as considering some common issues which arise in connection with property investment and development joint ventures.

2. Overview of types of structures 

The main types of joint venture structure we generally use are as follows.
Partnership based structures:
General partnerships (including contractual joint ventures)
Registered limited partnerships
Limited liability partnerships
Private limited companies
There are of course numbers of other vehicles that might be of relevance. For example, it may be attractive to use offshore vehicles for tax structuring purposes. Alternatively, certain types of investor may wish to acquire investments in vehicles which are listed on a recognised investment exchange. These types of structure are beyond the scope of this article, which instead focuses on those onshore vehicles which are encountered most frequently in practice.

3. Selecting the structure

There are a number of factors which will need to be taken into account when structuring a joint venture:
Nature of the Project
Is this a development or investment project? What is the size of the deal? A relatively small transaction is unlikely to bear the costs associated with more complex structural arrangements. 
Relationship between the parties
Long term business partners may be perfectly happy with a partnership structure in which they are jointly and severally liable for partnership debts, but that is unlikely to be appropriate where there are a number of passive investors.
Tax considerations will, whilst not necessarily the sole determining factor, be an important consideration in any joint venture structuring. Relevant points to consider include:
Should the vehicle be tax transparent?
Is it appropriate and/or feasible to try and use an offshore vehicle?
Can an SDLT saving be made through the use a particular type of vehicle?
The vehicle used can have a significant impact upon the tax liabilities of the joint venture partners and it is essential that tax advice is taken before the structure is put in place. Changing the structure at a later date may, in itself, give rise to tax liabilities.
Limiting Liability
Is it important to have a vehicle which offers participants limited liability and the ability to ringfence losses and liabilities in the joint venture? Property joint ventures in particular can expose participants to numbers of potential hidden liabilities - for example, the law can impose a statutory obligation on owners to undertake extensive remediation work of contaminated land. Of course, the benefit of limited liability offered by a number of structures may be restricted in many cases if a funder, landlord or other creditor insists upon the provision of guarantees or other personal security.
Liquidity and Flexibility
Is it important to have the flexibility to change the relative interests of the parties and/or bring in new investors? The eventual exit route also needs to be considered. If it is possible that the vehicle itself will be sold rather than the property, then that is likely to rule out certain types of structure.
Consideration needs to be given as to the manner in which the joint venture will be funded. For example, a limited company gives the flexibility to create different types of share capital and loan capital and is also able to offer a full security package to funders.
Management and control
The expectations of the parties as to management and control of the vehicle will also impact upon the choice of vehicle. Does the traditional limited company division between shareholders and the board suit the parties, or will all investors be involved in the day to day management?
Are the participants concerned about any information regarding the joint venture being in the public domain?

4. Structure - 1: General Partnerships (and contractual joint ventures)

General partnerships are governed by the Partnership Act 1890. There is no particular formality required to form a partnership, a partnership arises when two or more people carry on a business with a view to profit. Similarly, there is no need to register a partnership or formally declare to the outside world that it has been formed. A partnership arise can arise simply from the conduct of the parties. It is possible that two individuals co-investing in property projects will as a matter of law be carrying on a partnership, regardless of whether they hold themselves out as partners.
If a joint venture is carried on through a partnership, then the joint venturers will be jointly and severally liable for all debts of the joint venture. The partners cannot ringfence losses and liabilities in the joint venture. A partnership is tax transparent - each partner is liable to tax on their own share of both income and capital profits and no tax is assessed on the joint venture itself. A particular advantage of a partnership is that there is no obligation to file accounts or annual returns at Companies House, so the joint venture affairs can be kept confidential. There is also no requirement to have the joint venture accounts audited.
A significant disadvantage of a partnership structure however is the absence of a separate legal entity with its own externally recognisable management structure in which the assets and liabilities of the business can be vested and which can raise finance (including creating fixed and floating charges as security). Of course, that is not to say that a partnership cannot own assets or raise finance, but the absence of a separate legal entity does complicate the process.
In the context of partnerships, it is also worth touching briefly on contractual joint ventures. A contractual joint venture involves two or more individuals or entities agreeing contractually to co-operate in some way in relation to a project. As such they have largely the same characteristics as a partnership and the same advantages and disadvantages. In fact most will involve the sharing of revenues, costs or profits and will therefore constitute a partnership, even if the joint venture agreement states otherwise.

5. Structure - 2: Limited Partnerships

 Limited partnerships are governed by the Limited Partnership Act 1907, and need to be registered at Companies House. A limited partnership will have both limited partners and a general partner. The liability of limited partners is limited to their capital contributions to the partnership. Capital contributions are therefore generally limited to a nominal amount, with the limited partners making further funding available by way of loan. 
In order to benefit from limited liability, the limited partners are not permitted to have any involvement in the management of the partnership business. The general partner has unlimited liability for the partnership debts and will be the entity which runs the partnership business and enters into contractual obligations on behalf of the limited partnership. A limited company is usually used to act as the general partner which protects the underlying investors from personal liability.
Limited partnerships are not a particularly attractive vehicle from a liquidity point of view. Although further partners can be introduced into the structure, it is not as straightforward as, for example, allotting shares to a new investor in a limited company. It is also unlikely that a purchaser of the property would consider acquiring the interests in the limited partnership instead, whereas they may well be prepared to acquire the shares in a limited company.
Onshore limited partnerships were at one time a popular vehicle for property joint ventures, but with the advent of LLPs (discussed below) they have been used less frequently for genuine joint ventures. They are however still relatively common for investment funds.
One benefit of limited partnerships is that they are not subject to the Companies Act compliance regime in the same way as limited companies and LLPs, so generally they will not have to, for example, file annual accounts. However, in truth even that is not as straightforward as it might be as some or all of the partners (in particular the general partner) may themselves be onshore limited companies and therefore subject to the Companies Act regime.

6. Collective Investment Schemes

As well as offering an overview of the different types of structure which can be used, this article also considers some particular traps for the unwary in the context of property joint ventures. The first of these is the rules on Collective Investment Schemes (“CISs”) under the Financial Services and Markets Act 2000 (“FSMA”).
CISs are defined in section 235 of FSMA as “Any arrangements with respect to property of any description, including money, the purpose or effect of which is to enable persons taking part in the arrangements (whether by becoming owners of the property or any part of it or otherwise) to participate in or receive profits or income arising from the acquisition, holding, management or disposal of the property or sums paid out of such profits or income”.
Broadly speaking, a property joint venture arrangement will constitute a CIS if some or all of the investors do not have day-to-day control over the management of the property, and either the contributions and profits are pooled or management of the property as a whole is carried out by or on behalf of the operator of the scheme.
Many property joint ventures therefore fall within the scope of the legislation and it is easy to unwittingly operate an unauthorised CIS. This will commonly arise where a number of passive investors are participating in the arrangements who have no intention of participating in the management of the joint venture business  themselves. They are effectively investing in the skill and experience of the project manager (who would be the operator of the scheme in this context).
Although this type of scenario, perhaps involving high net worth and/or sophisticated investors jointly investing in property development and/or investment, may not be the type of arrangement which the legislation is designed to catch, the legislation is broadly drafted enough for this to be a problem in practice.
The consequences of establishing and running an unauthorised CIS are serious. It is a criminal offence, the arrangements are unenforceable by the operator and the participants may recover both their investments from the operator of the scheme and compensation for loss.
Even leaving aside the prospect of criminal liability, there is a risk of a claim against the operator of a scheme falling within the rules (usually the property developer managing the development) from the passive investors should the project be less successful than anticipated.
One way of avoiding the application of the CIS rules is to structure the arrangements so that all participants have day to day control over the management of the property. That does not mean that everyone has to be on site every day or that certain functions cannot be delegated to agents or employees, rather that investors must genuinely be involved in management. The mere fact that they have a right under the joint venture documentation to be consulted or to give directions will not in itself be sufficient.
Alternatively, the legislation in relation to CISs does contain a number of exceptions. A number of these are unlikely to be relevant to most property joint ventures. 

7. Structure - 3: Limited Liability Partnerships (“LLPs”)

LLPs were introduced by the Limited Liability Partnerships Act 2000 and are essentially a hybrid between partnerships and companies. LLPs are separate legal entities and the members' enjoy limited liability, their liability being limited to their contribution to the capital of the LLP. In fact there is no legal requirement for members to contribute any capital to the LLP and for that reason funding is commonly provided by the members by way of loan.
One particular advantage that LLPs have over limited partnerships is that members of an LLP can be involved in the management of the LLP’s business without losing their limited liability. Although an LLP is a separate legal entity, it is transparent for tax purposes. So the LLP itself is not taxed on the income and capital profits it makes, but the members are taxed on their shares of those profits. This tax transparency has made LLPs extremely popular in recent times as a property joint venture vehicle (although it is not always the case that using an LLP will result in a lower tax bill than a limited company). Unlike, say, a general partnership, LLPs can grant a full security package to funders, including floating charges, which individuals are not able to do. On the other hand, LLPs are subject to the same filing requirements as companies and so need to file annual accounts and returns at Companies House, as well as details of changes of members and other prescribed information. That means that information relating to the joint venture will be in the public domain if an LLP is used.

8. Property Investment Partnerships and SDLT

Another potential trap for the unwary in the context of partnership structures is stamp duty land tax, or SDLT. Schedule 15 Finance Act 2003 contains complex provisions imposing charges to SDLT in certain situations, including where there are changes of partnership interests in “property investment partnerships”.
A property investment partnership is defined as “a partnership whose sole or main activity is investing or dealing in interests in UK land, whether or not the activity involves construction activities on the land in question”. “Partnership” for these purposes includes general partnerships, limited partnerships and limited liability partnerships, and so property joint ventures carried on through one of these structures can fall within the scope of this definition.
Whilst most people are aware that an SDLT charge may arise on the purchase of a property or an interest in property, many are unaware of the potential for a charge to arise when there are changes in partnership interests in a partnership that invests or deals in land. A charge could arise in the following circumstances:
where an existing partner sells some or all of their share to a new or existing partner;
where a person becomes a partner or increases their existing share in the partnership and one or more existing partner(s) reduce their partnership share (or retire from the partnership); and
where the partners change their profit shares.
Perhaps somewhat surprisingly, the rules apply when there is a change in the proportions in which the partners share in the income profits of the partnership. This is not what one would necessarily expect given that SDLT is usually payable when a capital disposal is made.
Broadly speaking, in order for a charge to SDLT to arise in these circumstances there needs to be either (a) a payment (not necessarily in cash) being made by the person acquiring the share or increased partnership share; or (b) a withdrawal of money from the partnership by the partner selling or reducing their share.
If the rules do apply then there are detailed provisions for calculating the amount of SDLT payable. The rules on SDLT and “property investment partnerships” are complex. The text above only summarises them briefly and cannot offer a comprehensive analysis, but it is essential for anyone considering a property joint venture structured through a partnership, limited partnership or LLP to be aware of the potential for charges to SDLT to arise other than on the sale of property, and to take advice before implementing any sales or transfers of partnership shares or changes in profit shares if the rules may apply.

9. Structure - 4: Limited company

The limited company is probably the most familiar of all the vehicles which may be used. Investors and lenders are likely to be comfortable dealing with a limited company, and of course a limited company is a separate legal entity with limited liability - so, unlike in a general partnership, the shareholders in a limited company will be able to ringfence any losses and liabilities relating to the joint venture.
Furthermore, if using an onshore company, the joint venture vehicle will be subject to a general body of company law, principally contained in the Companies Act 2006, which is generally recognised and understood and which offers a strong layer of residual protection for investors and lenders. Lenders will also benefit from the fact that a limited company can offer a full security package including granting a floating charge over its assets.
However, there are of course disadvantages to the use of a limited company – for example the 2006 Act imposes a layer of regulation which does not apply to partnerships. This has consequences in terms of confidentiality (various filings will need to be made publicly available, including year end accounts) and imposition of legal obligations such as directors’ duties (discussed in more detail below). 
The flexibility of a share capital structure means that it is relatively easy to introduce new equity capital into the joint venture. In terms of an exit, it is easier to sell or float an interest in a company (including the entire membership interest, i.e. the entire issued share capital), than in a limited partnership or LLP.

Tax Implications

Although a detailed look at tax rules is beyond the scope of this article, there are two points of general principle worth noting here.
First, there will be a stamp tax advantage on the sale of shares in a company which owns property assets, as opposed to a sale of the properties themselves. Depending on the value of the properties SDLT will probably be charged at 4%, whereas share transactions worth over £1,000 attract stamp duty at 0.5%, regardless of the value of the underlying property assets.
Secondly, using a company is likely to give rise to a double charge to taxation. A company will pay corporation tax on any profits it makes, and there will also be a charge to tax when it distributes money into the hands of shareholders by way of dividend (or salary/bonus). This lack of tax transparency does not automatically mean however that the overall tax burden will be greater if a limited company is used. This will depend on various factors, including the rates at which the limited company pays corporation tax and at which the shareholders pay income tax.

Want to know more, get in touch with our power team