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Failure of a sufficient understanding leads to bad result for developer in a "joint venture"


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Summary: The courts may step in where there is no contractually enforceable agreement between two parties. This case demonstrates that despite the absence of a clear contractual nexus, there must still be a clear and robust agreement to proceed. Where a party is considering bidding on a property with a proposed joint venture partner it should ensure that it has at the very least a written commitment from its prospective partner.

A recent decision revisited an equitable remedy in Pallant v Morgan which is often used by parties in undocumented joint ventures to claim a constructive trust interest in property where the “partner” reneges on the alleged arrangement.  The remedy, if successful, will require the reneging party to hold the property on constructive trust for it and its “partner” rather than for its own benefit.

Generator Developments LLP v Lidl UK GmbH involved the acquisition of a development site in Brentwood, Essex.  Generator was a reputable local developer and was, from the outset, a preferred bidder.  Lidl had also identified the property as a good location for a store and had instructed an agent to bid for the property. 

Learning of Lidl’s interest (and recognising the value that having a large corporate on board would bring), Generator approached it with a view to acquiring and developing the property as a joint venture. 

Following initial discussions an offer was submitted for the property by Generator “in conjunction with our joint venture partners Lidl”.   

Lidl and Generator then continued to discuss the terms of their prospective joint venture.  The basic principle was that Generator would get planning permission and develop a mixed-use scheme whilst Lidl would acquire the property in its own name as the buyer.  If Generator obtained planning permission, Lidl would transfer the property to Generator but take a leaseback of the store once the property was built-out.

Lidl completed the purchase.  Draft heads of terms for the joint venture with Generator were never finalised and a joint venture agreement was never entered into.  Whilst it continued to discuss partnership with Generator, Lidl also approached other developers to discuss developing the property.  In April 2014, Lidl informed Generator that it was seeking another development partner and that discussions between it and Generator were over.  Generator then issued proceedings against Lidl.

The basis of Generator’s claim was that, under the rule in Pallant v Morgan, Lidl held the property on constructive trust for it (and Lidl, as joint venturers). 

In basic terms, the rule in Pallant v Morgan will apply to an understanding between two parties before one of those parties buys a property.  The arrangement contemplates that one party will take steps to buy the property and the other party will acquire an interest.  In reliance on this, one party must then gain an advantage (or conversely the other party must suffer a disadvantage), so that it would be inequitable for the party holding the property to continue to do so solely for its own benefit.  It is unnecessary for there to be a contractually enforceable relationship between the two parties.

Generator argued that the numerous meetings and discussions it had with Lidl before Lidl’s acquisition of the property had led to an agreement that Generator would acquire an interest in the property.  In reliance on this “agreement”, Generator dropped out of the bidding process, leaving Lidl to acquire the property itself. 

The court found in favour of Lidl.

Whilst it was indeed discussed that Generator would acquire an interest in the property following completion of the acquisition, there was never any agreement from Lidl that this would be the case. 

The draft heads of terms and draft joint venture agreement had left a number of key commercial points open, which suggested an absence of common purpose.  The draft joint venture agreement also included a clause that Generator should have the right not to proceed with the “joint venture”.

Further circumstantial evidence (such as Generator only being named “delivery partner”) in the heads of terms also counted against Generator.

Given that there was no understanding or arrangement, it was not necessary for the court to consider advantage or disadvantage to either party.

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