Removal Events in Real Estate Joint Ventures: What Capital Partners Need to Know

January 6, 2026 | Author:  David J. Murphy

When a real estate joint venture goes wrong, the removal event provision determines whether the capital partner can act, and how quickly. These clauses define the triggers that allow an investor member to take management control away from the sponsor, and sometimes reduce or eliminate the sponsor’s economics, when performance falters or misconduct occurs. For capital partners committing significant equity to a project, few provisions matter more.

The Stakes

In a typical 90/10 joint venture, the capital partner provides the bulk of the equity but delegates day-to-day management to an operating partner with development or operational expertise. This structure works well when interests align. But the capital partner holds a concentrated, illiquid position with limited control, which is a mismatch that requires strong contractual protections if the relationship sours.

Removal provisions address this imbalance. They give the capital partner a defined path to take control when the sponsor defaults on obligations, commits bad acts, or fails to hit critical milestones. Without clear triggers and streamlined procedures, a capital partner may find itself locked into a deteriorating investment with no practical recourse.

Core Trigger Categories

Removal events generally fall into several categories, each addressing a distinct risk.

Payment and funding failures. The most straightforward triggers involve the sponsor’s failure to meet payment obligations such as missing a capital call, failing to fund a deficit contribution, or causing a shortfall in preferred distributions. These defaults affect the primary economic bargain and typically carry short cure periods, if any.

Bad acts. Fraud, embezzlement, gross negligence, and willful misconduct warrant immediate removal without opportunity to cure. These provisions parallel the “bad boy” carve-outs in recourse guaranties and reflect conduct so egregious that the capital partner should not be required to wait.

Loan-related defaults. Because the project’s financing is typically non-recourse to the capital partner but secured by the property, loan defaults pose a significant risk. A sponsor who triggers an event of default under the loan documents, or worse, accelerates the debt, jeopardizes the entire investment. Capital partners routinely insist that loan defaults constitute removal events, subject to carve-outs for conduct the capital partner approved or caused.

Key person and control changes. Capital partners invest in sponsors, not just deals. If the principals who negotiated the venture depart, die, or lose control of the sponsor entity, the capital partner may no longer have confidence in the management team. These provisions require careful definition of who the “key persons” are and what constitutes a change in control.

 Covenant and representation breaches. Sponsors make representations about their financial condition, legal standing, and operational capabilities. They also commit to affirmative and negative covenants governing how they will manage the venture. Material breaches of these obligations, particularly if uncured after notice, typically trigger removal.

 Operational and milestone failures. Some capital partners tie removal rights to specific performance benchmarks such as construction completion by a date certain, lease-up thresholds, or budget compliance. These “soft” triggers are often the most heavily negotiated because they impose objective standards on inherently uncertain outcomes.

Key Negotiation Points

The trigger list matters, but so do the mechanics. Capital partners should focus on several structural elements.

 Cure periods. Sponsors will seek time to remedy defaults before removal becomes effective. For monetary defaults, cure periods are typically short at five to ten days, or nonexistent. Non-monetary defaults may allow thirty days or longer, sometimes with extensions if the sponsor is diligently pursuing a cure. Capital partners should resist open-ended extensions that delay action indefinitely.

Determination standards. Who decides whether a removal event has occurred? Language granting the capital partner “sole and absolute discretion” provides maximum flexibility. Sponsors may push for “good faith” or “reasonable” standards, which invite dispute. The choice affects not only the capital partner’s ability to act but also the likelihood of litigation.

 Consequences of removal. Removal from management is the baseline remedy, but capital partners often negotiate for more such as forfeiture of the sponsor’s promote, termination of affiliate service contracts, and loss of voting rights on major decisions. These penalties increase the sponsor’s incentive to perform and reduce the capital partner’s exposure if removal occurs.

 Dispute resolution. Sponsors sometimes negotiate for the right to challenge a removal through expedited arbitration. Capital partners should ensure that any dispute mechanism does not delay their ability to take control, or, at minimum, that the capital partner can serve as interim manager pending resolution.

A Practical Perspective

Removal provisions are not meant to be used. Their primary function is to align incentives and establish clear expectations at the outset. A well-drafted provision encourages the sponsor to perform, gives the capital partner confidence to commit capital, and provides a roadmap if the relationship breaks down.

Capital partners reviewing or negotiating these provisions should resist the temptation to treat them as boilerplate. The specific triggers, cure mechanics, and post-removal consequences vary widely across deal documents, and those differences matter when a project underperforms.

We welcome the opportunity to discuss these provisions in the context of a specific transaction or portfolio.

David J. Murphy is the managing attorney at Murphy PC in Boston, Massachusetts.  He regularly represents real estate developers and investors in real estate development projects.