Financial arrangements between family members can be complex. On top of the many legal principles which might operate there are the emotional or familial ramifications of entering into financial obligations with a family member and the interplay between relying upon a family connection for security as against taking legal steps to document the rights, responsibilities and obligations of introducing a financial aspect to an existing relationship.
We see this all the time in family law matters, where people rely upon existing relationships (whether parent-child, between siblings, or otherwise) to provide certainty in the event that the enterprise fails, rather than documenting the agreement contractually or by deed. Most commonly, this problem arises when parents contribute moneys to their children’s house purchase. This is commonly subject to a verbal agreement for the funds to be repaid “when you can”. It is natural for parents to want to see their children succeed in life, including on that first rung of the housing ladder.
But what happens if the child is in a relationship which fails? Frequently, moneys contributed by parents towards the purchase of a property are asserted by one party to be a loan owing back to the parents. The other party denies the existence of the loan, sometimes even saying that reading about the purported loan in court documents or lawyers letters is the first time they have even heard about the parents’ financial contribution.
So, how does the Family Court deal with these issues?
The first principles are some quite old fashioned laws deriving from the courts of equity.
It is well established that where a property is purchased, but the title to the property ends up being held by someone other than the party who contributes the funds, that there will be a presumption applied that the property belongs in equity to the person who provided the funds, and not the person who is registered on title. This is called a resulting trust, the idea being that ownership of the property “results” back to the party who actually bought the property and not the intended owner or the owner “on paper”. The legal owner holds the property on trust for the person who provided the funds.
Like all presumptions, the presumption of resulting trust can be rebutted by actual evidence of intention for the third party to become the legal owner. It is also rebutted by a further presumption, called the presumption of advancement. Under this presumption, it is presumed that people in certain close relationships who provide the funds to complete a purchase intend for that third party to hold the property themselves and so therefore the property does not result back to the party who provided the money. The parent-child relationship is the prime example of this kind of relationship. The law presumes that if a parent buys a property for a child, that the parent intends the child to become the owner of that property. The idea here is that parents intend their children to “advance” in life. The law around the presumption of advancement is very old fashioned, so it might not apply to step-parents and step-children, or other more modern familial arrangements. In some jurisdictions it has been abolished either in whole or in part.
Again, the presumption of advancement can be rebutted by actual evidence of intention not to provide a benefit to the child.
That legal backdrop, these vague and old fashioned presumptions of intention, apply when parents help their children to purchase property. Like in all court cases, it all boils down to evidence. That evidence can be documentary, or evidence of oral agreements, however in the absence of any evidence, the presumptions will apply.
This means that if a party wants a transaction to be considered a loan, there needs to be evidence that it is in fact a loan. The better that evidence is, the more likely it will be that the Family Court accepts that a transfer of money to assist in the purchase of a property is actually owing back to the parents. It is here that the difficulties of entering into financial obligations with family members comes in. Quite often what the parties want is neither a relationship of lender and borrower, or of donor and recipient, but something in between. Unfortunately, a transaction cannot change its quality after the fact (or, in this kind of case, after separation). The transaction is either a loan, or a gift, at the time it was made, and this is what the evidence needs to prove.
So what kinds of evidence are required to demonstrate that a transaction is intended to be a loan, and to rebut the presumption of advancement?
The gold standard is a properly drafted loan agreement taken together with repayments being made under the agreement. That loan agreement should have all the standard terms of a loan – namely, a schedule for repayment, the possibility of interest being repaid, default clauses which provide for what will happen in default of payment, and a known start date for repayment. On top of that, payments should be made under the agreement. If related parties enter into an agreement but never take any steps to enforce that agreement if there is a default, it could be argued that it is a sham. Or, put another way, what kind of loan never has to be repaid?
The further parties diverge from the commercial norm of a loan between unrelated parties the less likely it becomes that the relationship will be viewed as borrower and lender, and more likely to be donor and recipient. Quite often parties enter into documents, purported to be loan agreements, but which do not have required repayments, or the repayment and default clauses are too vague, or no repayment date at all. Agreements with no start date for repayments have problems with the Limitations of Actions Act and may not be enforceable agreements. Agreements can be void for uncertainty.
This brings about a familial tension. Most parent-child relationships are not commercial in nature. It is understandable that families might not want to have the difficult conversations around issues like these. It might also be the furthest from anyone’s mind at the time when a young couple find their first home. These issues commonly arise when a child separates from their spouse and relationships are tense but by then it’s too late.
When thinking about helping out your children, remember that these two presumptions apply. The starting position is going to be that you intended that your moneys, given to help out your biological child with a home purchase, is a gift. The evidence will need to show that you intend the transaction to be a loan. That evidence needs to establish that the moneys need to be repaid. Depending on your actual family dynamics, the presumptions might hinder or assist you. For example, a step-parent who gives money to a step child might find that gift being assumed to be a resulting trust.
What all of this means is that when assisting family members with the purchase price of property, all parties should be clear about whether the transfer is a loan or not. If it is going to be a loan, that loan should be documented clearly with each parties’ obligations defined. Furthermore, it needs to look like a loan, with repayments. The risk otherwise is a drawn out and expensive court case, where parties give evidence about conversations which took place years before, witnesses are defensive and make recriminations against each other, with a judge trying to sort through differing accounts of long past events and trying to make determinations about parties’ truthfulness and credit.