Guide to Unincorporated Joint Ventures in Project Finance

An unincorporated joint venture (UJV) is a contractual alliance between two or more parties that choose not to form a separate legal entity. Instead, they cooperate under a detailed JV agreement while keeping assets, liabilities and tax positions on their own balance sheets. In capital‑intensive projects—mining, energy, transport—UJVs give sponsors flexibility and speed, yet lenders must understand how cash flows, security and liabilities are shared. This guide walks through the structure, legal considerations and financing implications of UJVs in project finance.

1. UJV vs Incorporated JV: Key Differences

• Legal Personality
  • UJV: no separate entity; agreement governs rights and duties.
  • Incorporated JV: company or LLP with its own legal status.
• Ownership of Assets
  • UJV: assets held as tenants‑in‑common or under common operator; title splits per equity share.
  • Incorporated JV: assets owned by the SPV.
• Tax Treatment
  • UJV: profits and losses flow directly to participants.
  • Incorporated JV: SPV pays tax first, then distributes.
• Liability
  • UJV: each party is liable for its share—or joint and several if contract states.
  • Incorporated JV: liability confined to shares held.

2. Why Sponsors Choose UJVs

• Faster documentation—no need for corporate formation or regulatory filings.
• Direct booking of reserves or production share (mining, oil & gas).
• Retention of existing licences, concessions and tax attributes.
• Greater exit flexibility—transfer of undivided interest rather than equity sale.

3. Core Documents

• Joint Venture Agreement (JVA) – allocation of costs, revenue, decision‑making, voting thresholds, default remedies.
• Operating Agreement – appoints operator, sets work programs, budget approvals, reporting.
• Offtake / Sales Contracts – match each participant’s production share or designate a marketing agent.
• Security Documents – separate pledge agreements for each party’s interest when financing is involved.

4. Financing a UJV

4.1 Single‑Borrower Approach

One participant (often the operator) raises debt and on‑lends or carries partners. Lenders rely on that borrower’s balance sheet plus assignment of its UJV interest.

4.2 Pro Rata Borrowing

Each partner funds its share independently. Favoured when creditworthiness varies; avoids cross‑default risk but complicates construction timetable.

4.3 Club Loan to Participants

Bank club extends parallel facilities to each sponsor under a common term sheet. Same covenants, security parity, separate drawdowns.

5. Security Package Considerations

• Pledge of undivided interest in project licences, leases or concessions.
• Assignment of proceeds under offtake agreements.
• Charge over project accounts—including debt service reserve accounts—maintained per participant or pooled.
• Direct agreements with contractors and operator for step‑in rights.

6. Risk Allocation

• Cost Overruns – usually borne in proportion to equity share; defaulting partner can be diluted.
• Operator Performance – indemnities for negligence, but lenders need cure rights before removal.
• Withdrawal – exiting party forfeits future production but may remain liable for approved budgets.
• Force Majeure – relief allocated per work program; insurance proceeds distributed pro rata.

7. Accounting & Tax Highlights

• IFRS allows proportionate consolidation or equity method, depending on control.
• Capital allowances flow to each sponsor, improving after‑tax returns.
• Withholding and VAT planning must reflect direct sale of share of output.

8. Lender Due Diligence Checklist

• Ensure JVA cannot be amended without lender consent.
• Confirm cross‑default clauses tie into financing agreements.
• Verify liens are registrable in all relevant jurisdictions.
• Model cash flows for each participant under downside scenarios.

9. Exit & Transfer Rights

• Right of first refusal for existing partners.
• Drag‑along / tag‑along if majority sells.
• Pre‑approved transferee list to satisfy lenders and regulators.

10. Practical Steps to Form a UJV

1. Draft term sheet covering equity split, operator role, budget approval matrix.
2. Mandate legal counsel to prepare JVA, operating agreement and security term sheet.
3. Secure preliminary lender feedback on structure and covenants.
4. Finalise offtake, EPC and O&M contracts aligned with cash‑flow model.
5. Execute financing, close JVA, and file security registrations.

11. Common Pitfalls & How to Avoid Them

• Ambiguous voting thresholds—set clear super‑majority rules for capex changes.
• Unfunded partner risk—include dilution or default buy‑out mechanisms.
• Mismatch between operator incentives and lender covenants—align KPIs to financing terms.
• Regulatory consents overlooked—early engagement with mineral, energy or planning authorities.

12. How Financely Supports UJV Sponsors

• Structuring term sheets reflecting UJV cash‑flow splits.
• Financial modeling per‑partner, including DSCR, LLCR and reserve analysis.
• Lender sounding, mandate negotiation and club formation.
• Security package drafting with local counsel oversight.
• Ongoing covenant monitoring and amendment management.

This guide offers a high‑level overview of UJV structures in project finance. Sponsors should obtain legal, tax and financial counsel tailored to jurisdiction and sector specifics.