"Shop a Lidl Smarter" - The danger of 'draft' joint venture agreements
There exist a multitude of reasons why a deal that has been struck never quite makes it on to paper. Time marches on. The parties decide to focus on progressing the deal, not ironing out the detail of the contract and then suddenly one party finds itself ruing that decision.
Ignoring the legals isn't always fatal. Various tools exist which might save an undocumented deal, including the ability to call for a constructive trust interest in property, where the other party to an undocumented joint venture seems to renege on the arrangement. If successful, the reneging party must hold the property on trust for its deemed joint venture and not solely for its own benefit (a Pallant v Morgan trust).
It was exactly this arrangement that Generator Developments LLP asked the court to find, earlier this year, against its alleged JV partner, Lidl UK GmbH.
The Purported Arrangement
Both parties were interested in a development site in Brentwood, Essex. Generator became aware of Lidl's interest and sought to improve its negotiating position by looking to join forces with Lidl. The offer to purchase was submitted, and the parties turned their attention to the detail of their prospective venture.
The thrust of the proposal was that Generator would get planning permission to develop a mixed-use scheme. Lidl would acquire the site in its own name. Upon a successful planning application, Lidl would transfer its interest to Generator, taking a lease back once the store was developed.
Lidl completed the purchase. The draft heads of terms that had passed between the parties had never finalised and been codified into a joint venture agreement. Indeed, Lidl had never taken it as read that Generator would be its development partner (and had been discussing the matter with other developers), and in 2014 informed Generator that discussions were over. Generator argued that the many meetings and discussions between itself and Lidl prior to the purchase amounted to an agreement that Generator would be acquiring an interest. Based on this, Generator had stopped bidding on the property, and Lidl had acquired the site itself.
The court was unimpressed with Generator's case and found in Lidl's favour. Generator had a distinct lack of "skin in the game".
The court was not satisfied that the pre-acquisition discussions could be held to amount to an agreement. Key commercial points were left unresolved and so there was no common purpose behind the alleged deal. It was not fatal to the claim that the negotiations were marked subject to contract, however the lack of real agreement pre-acquisition was.
Things might have been different if Generator had obtained some sort of written commitment from Lidl, but an analysis of the evidence showed that even on its own understanding at the time, Generator could not show that it thought it would definitely acquire an interest. Proving, therefore, that there was a mutual understanding on that point and that the site should be held on trust was impossible.
- Draft agreements are just draft agreements.
- Whilst there are sophisticated tools within the court's arsenal, the court's role is not to permit claims which arise from failed negotiations;
- Even a "Subject to Contract" minute recording the structure of the deal is better evidence than nothing;
- The best insurance against wasting significant time on a project is to tee up the legals from the off.
The rules surrounding a Pallant v Morgan trust (revisited in 2000 by the Court of Appeal in (Banner Homes Holdings Limited (formerly Banner Homes Group plc) v Luff Developments Ltd (No 2) (2000) Ch 732)) require an applicant to show that ahead of the purchase of a property, it had reached an understanding with a 'partner' regarding the future of the property. Broadly, one party will acquire the property and the other will later also acquire an interest in it. Trusting the arrangement, one party gains an advantage (or the other a detriment) over the purchase process. If the buying party does not tell its partner that it will not honour the 'understanding' and it is inequitable for them to retain the property a trust may well be found in favour of the partner.