Joint venture formations hinge on the details

NM-Law-Blog-Joint venture formations hinge on the details

Joint venture agreements have become an increasingly common way to fund projects in the UAE, especially in the area of real estate. Agreements ranging from simple joint development agreements (JDAs) to more complex and bespoke structures are becoming the norm as developers navigate their way through an increasingly competitive real estate market.

In light of this, it would be prudent to review the concept of joint ventures from a legal as well as practical perspective in order for market participants to get more insight into the matter. Joint ventures are recognized in the UAE pursuant to the UAE Companies Commercial Law (Federal Law number 8 of 1984) and subsequently amended to Companies Law (Federal Law Number 2 of 2015).

These laws apply to Dubai’s Department of Economic Development’s jurisdictions. For the free zones, there exist an individualized and often bespoke set of laws that deal with some of the nuances in a different manner. The DIFC in this regard has the highest degree of autonomy among the free zones, and is exempt from all but a handful of federal laws, having been established as a ring-fenced geographical financial district.

While the latter has is own legal framework, it is prudent to note that for all the other free zones, industry specific laws also come into place wherever the joint venture is being established, either legally and/or contractually. Therefore, for real estate joint ventures, given the fact that they are capital intensive, it is imperative to get the founding documents in order.

This is done usually through the memorandum of association (MOA), which needs to be notarized at the DED as well as at free zone jurisdictions. There are instances where joint venture partners do not wish to incorporate; this makes the process more difficult when disputes arise at a later stage. It is always recommended to get the joint venture incorporated in order to spell out the rights of each party.

There are other reasons for incorporation as well being the preferred mode. These include allowing for any change in statutory legislation or laws (which is especially the case in the real estate industry), financial risks that occur in case of over-runs (also fairly common), and/or the change of shareholders (either addition and/or withdrawal of shareholders and/or a change to their respective shareholding).

Nearly all real estate projects require third-party funding. This is done either through the raising of debt, and/or registering the project (where it is freehold) and raising monies through off-plan sales. Given the scale of financing, and the changing nature of the marketplace, there must always exist clear guidelines for exit mechanisms, dispute resolution, and include for the provision of certain common eventualities (such as cost over-runs).

This therefore implies that at the formation stage, there should be a careful evaluation of the agreements so as to not to cause the project to be jeopardized at a later date.

While most of what I have stated sounds fairly commonsensical, it is surprising to note the frequency of projects that have failed to adopt such a stance. In many stalled projects, the lack of clarity in the foundational documents led to a number of stalled projects that have wound up in court and/or arbitration.

Market dynamics of any industry always dictates the amount of capital that is allocated to business ventures. In times of rising markets there is always a rush of capital as businessman strive to capitalise on the opportunities that are present.

This is a vital dynamic of a free market system, and is a healthy output that leads to growth in the economy. However, a careful amount of due diligence (which includes a detailed overview of the formation of the company and/or the joint venture) is always a discipline that must be adopted in order to minimize the probability of disputes when exogenous events — market correction, cost over-runs, etc — inevitably occur.

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