In anticipation of the World Expo 2020 and as part of the broader UAE vision 2021, the Dubai real estate market has experienced an increase in the use of joint venture arrangements between foreign developers and local land owners as a means of developing real estate. More often than not, such joint venture arrangements are proposed by experienced foreign developers to land owners who may not have the time or know-how to monetise the land.
However, if structured properly, both parties can come out winning from such an arrangement.
In Dubai, a joint venture between a foreign developer and a local land owner can be structured through an “incorporated joint venture” or a “contractual joint venture”. Under an “incorporated joint venture” structure, a new company is incorporated and which is jointly owned by the joint venturers.
In Dubai, typically a limited liability company (LLC) is incorporated as it is considered the most suitable form for joint ventures between local and foreign entities due to the flexible management structure, the availability of minority shareholder protections, the ease of formation, and the operation of the Dubai Land Department’s current policy on foreign ownership of land.
That is, foreigners can only own land in the designated areas in Dubai via three company vehicles, being: (1) an LLC which is 51 per cent owned by a local and 49 per cent owned by a foreigner; or (2) a JAFZA offshore company or a DMCC offshore company that can be both up to 100 per cent owned by foreign entities.
Under a “contractual joint venture” structure, the joint venture is merely a contractual arrangement between the parties. In Dubai, this structure is rarely used because it cannot be registered.
The main considerations for joint venturers when establishing are the contribution of capital/assets, management and governance, distribution of profit and losses, exit provisions, deadlock and dispute resolution. These issues are typically documented and dealt with in a formal joint venture agreement, as well as in the articles of association of the LLC.
Contribution of capital/assets
Typically, joint venturers contribute equity combined with “in-kind” contributions, which are often in the form of development management services from the foreign developer and land from the local land owner.
Management and governance
A joint venture arrangement is typically managed by a board of directors. However, there is often a list of reserved matters that require shareholder approval. It is also common for joint venture partners to execute non-compete agreements.
Distribution of profit and losses
Although the law prescribes that in an LLC, the local land owner must own 51 per cent of the share capital, the joint venturers can determine an alternative ratio for the profit and loss distribution themselves.
Deadlocks and dispute resolution
The joint venture agreement typically sets out how deadlock situations will be resolved between the joint venturers. One common method is to create a decision-making authority or committee in the joint venture entity and designate the process for deadlock situations to be resolved. Alternatively, joint venturers may establish an obligation to escalate the deadlock to senior management to negotiate in good faith to resolve the deadlock for a period, after which the given dispute resolution mechanism would apply.
Thereafter, dispute resolutions common in the UAE are litigation or arbitration.
— Shahram Safai is a Partner and Anna White an Associate at Afridi & Angell Legal Consultants’ Dubai office.