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Caveat lender, and consistency in law

In our legal firm, we have noticed numerous clients helping their children financially to enter the property market. Family loans can have complexities and there are potential risks if the loan is not documented properly. Most clients have taken our advice and documented their arrangements as loans, however we also advise them to review their actions as they should not be regarded as ‘set and forget’ transactions given that the law has a statute of limitations in each state and territory.

In addition, it is important that the conduct is consistent with the documents for them to be effective. Otherwise, a disappointed spouse of your child could claim that the loans were not authentic, merely a sham.

Family arrangements may not always turn out well

The recent case of Bircher & Bircher and Anor (2016 FamCAFC 123) is instructive. A son had written mortgage documents regarding two loans he received from his father. The documents seemed to be properly drafted. However, it seems that ‘the wife’ (as the cases refer to female spouses in the Family Court) claimed that the loans were almost too well drafted so as to arouse suspicion. The judge observed that the husband detailed conversations he had with his father “it would seem, with a great deal of particularity in … affidavits”. A schedule produced by the father was “entirely self-serving”.

The original judge was not impressed by any of the parties and said both “were plainly unhealthily interested in making money through means other than just getting a job and working”.

Much was made in court of the fact that a witness to each of the mortgages was the father’s administrative assistant, and later his wife.

Similarly, the conduct of the loan was examined closely. No explanation was provided for why the initial agreement of a flat interest payment was changed to compound interest. Purported expenses were added to the loan balance but there was no agreement as to this arrangement. While the initial judge found that the loans were real and that the interest was properly sought, the Court of Appeal found that the judge needed to establish the terms of the loan and the evidence to support it.

Risks involved in such loans

The case reveals the risks involved for the person making the loans. Quite apart from reputational risk, the court found that, as the parties did not have substantial assets and the husband and father failed in the appeal, they should pay the wife’s costs. The costs order was made joint and several so the father may well have had to pay all of the costs of that hearing.

The matter was sent back to the Family Court for a trial on the evidence about the loan. These cases are not cheap to run and it remains to be seen who will be asked to pay the costs of that hearing.

The lesson here is that you need to have clear loan documents that reflect an agreement that is carried out and have the other spouse as a party to the loan.

With respect, we beg to differ with Shakespeare: neither a borrower nor a lender be, unless you document the loan properly and administer it in accordance with those documents.

 

Donal Griffin is a Principal of Legacy Law, a legal firm specialising in protecting family assets. This article is educational and does not consider any individual circumstances.

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