Joint ventures are a common and often lucrative structure in Ontario’s commercial real estate sector. They allow multiple parties, whether individuals, corporations, or institutional investors, to pool resources, share risks, and access opportunities that might otherwise be out of reach. But while these arrangements offer many benefits, they are not without risk. The legal, financial, and operational consequences can be substantial when a joint venture breaks down.

This blog explores the common causes of joint venture disputes in real estate, outlines available legal remedies and exit strategies, and offers guidance for parties seeking to protect their interests when a business partnership falters.

Understanding the Nature of Real Estate Joint Ventures

A joint venture (JV) is a business arrangement in which two or more parties collaborate on a specific project or investment while maintaining their separate legal identities. Commercial real estate often involves pooling capital, sharing management responsibilities, and dividing profits (or losses) based on predetermined terms. Joint ventures can be formalized through a variety of legal structures, including partnerships, corporations, or co-ownership agreements, and are governed by a combination of contract law, partnership law, and real estate law.

The parties typically enter into a joint venture agreement (JVA) that sets out their respective roles, contributions, decision-making powers, dispute resolution mechanisms, and exit rights. The quality of this agreement—and the extent to which it anticipates future issues—can greatly affect the likelihood and severity of disputes.

Common Causes of Joint Venture Disputes in Real Estate

Despite best intentions, joint venture relationships can break down for a number of reasons. One frequent source of tension is disagreement over strategy, such as whether to sell, refinance, or hold a property longer. Others include:

• Unequal contributions: One party may allege that another is not contributing enough capital, labour, or management.
• Financial mismanagement: Disputes often arise when there is perceived misallocation of funds, unauthorized expenses, or inconsistent financial reporting.
• Breach of fiduciary duty: Partners may accuse one another of acting in self-interest or failing to disclose material information.
• Failure to meet milestones: Delays in construction, leasing, or development can erode trust and lead to conflict.
• Exit timing: One party may want to exit or liquidate their interest before the others are ready.

When these disagreements escalate, they can threaten the viability of the entire project.

Exit Strategies: Negotiated vs. Pre-Defined Mechanisms

One of the best ways to manage a joint venture breakdown is through a clearly defined exit strategy. Ideally, the original JVA includes provisions that govern how parties can withdraw, be bought out, or wind down the venture. These clauses help minimize uncertainty and avoid litigation.

Buy-Sell Clauses

Many JV agreements include buy-sell mechanisms that allow one partner to offer to buy out the other’s interest—or to be bought out themselves—under specified terms. Variants include the “shotgun” clause, where one party offers a price per share or interest, and the other must either accept the offer or buy out the offering party at the same price.

These mechanisms can be effective when partners are deadlocked, but may not be appropriate where there are large power or financial imbalances between the parties.

Right of First Refusal (ROFR)

ROFR clauses allow existing partners to match an outside offer before a venturer can sell their stake to a third party. This helps maintain continuity within the venture and prevents unwanted outsiders from gaining a foothold.

Drag-Along and Tag-Along Rights

These provisions are especially useful in ventures involving multiple investors. Drag-along rights allow majority owners to force minority owners to sell their shares if a third-party buyer is found. Conversely, tag-along rights protect minority investors by allowing them to join in on any sale.

Winding Up and Partition

If no buy-out or transfer can be agreed upon, parties may decide, or be forced, to wind up the joint venture and distribute the proceeds of a sale. In cases involving co-ownership of land, one party may apply to the court under Ontario’s Partition Act to force a sale or division of the property.

When Negotiation Fails: Litigation as a Last Resort

Although litigation is usually a last resort, it becomes necessary when the parties are too entrenched in their positions to resolve the dispute amicably or when one party is materially breaching the agreement.

The specific type of litigation depends on the joint venture’s legal form and the dispute’s nature. Common causes of action include:

• Breach of contract: A party may sue for failure to perform obligations set out in the JVA.
• Breach of fiduciary duty: Courts impose fiduciary duties on partners and, in some cases, co-venturers. Breaches can involve self-dealing, conflicts of interest, or failure to disclose information.
• Oppression claims: Where the joint venture is structured as a corporation, the oppressed party may bring a claim under section 248 of the Ontario Business Corporations Act if they are being treated unfairly or prejudicially.
• Accounting and tracing claims: A partner may demand an accounting of how venture funds have been used, particularly if there are concerns about misappropriation or self-dealing.
• Declaratory relief or specific performance: Parties may ask the court to enforce or interpret specific provisions of the JVA.

The Role of Arbitration and Mediation

Some JV agreements require parties to submit to arbitration or mediation before launching a court action. Arbitration can provide a faster, more confidential, and potentially more cost-effective way of resolving disputes than litigation. However, it also limits appeal rights and judicial oversight.

Mediation, meanwhile, offers a flexible, interest-based forum that can help preserve business relationships. It is particularly effective when the parties are open to creative solutions or partial settlements.

Drafting Better Joint Venture Agreements to Prevent Future Disputes

Many joint venture breakdowns can be traced back to vague or poorly drafted agreements. To reduce risk, JVA’s must be prepared by experienced counsel and address key contingencies precisely. Essential elements include:

• Clear contributions (capital, expertise, time)
• Defined roles and decision-making processes
• Deadlock-breaking mechanisms
• Exit provisions with timelines and valuation methods
• Confidentiality and non-compete clauses
• Dispute resolution procedures (including choice of law and forum)

Without these, the venture is vulnerable to dysfunction, particularly when market conditions shift or interpersonal relationships deteriorate.

Practical Tips for Navigating a JV Breakdown

If you’re involved in a real estate joint venture that is heading toward breakdown, it is critical to act strategically. Here are a few practical steps:

• Review the JVA in detail: Understand your rights, obligations, and potential liabilities.
• Gather documentation: Keep detailed records of communications, financial transactions, and board or partner decisions.
• Attempt early negotiation: A respectful, interest-based conversation may uncover common ground.
• Seek legal advice early: A commercial litigation lawyer can assess the strength of your position and help you avoid missteps.
• Preserve the asset value: Even during conflict, parties should aim to avoid harming the property’s marketability or operations.

Navigating Ontario Real Estate Joint Ventures: Protecting Your Investment

Joint ventures can be a powerful vehicle for real estate development and investment in Ontario, but they require careful planning, clear documentation, and strong communication. When things go wrong, knowing your legal rights and options is essential. With the right exit strategies and legal support, even contentious JV breakdowns can be resolved efficiently, without destroying the underlying asset or business reputation.

Facing a Real Estate JV Dispute in Ontario? Get Trusted Legal Solutions

Don’t let real estate joint venture challenges jeopardize your investment. At Milosevic & Associates, our experienced Toronto commercial real estate lawyers are dedicated to guiding clients through complex transactions and disputes. With a deep understanding of risk management in significant commercial real estate dealings, we provide comprehensive legal support. Should your transaction lead to a dispute, we are prepared to represent your interests vigorously in court. Discover how our experience can benefit you by calling us at 416-916-1387 or connecting with us online today.