Thinking about helping your children buy a property? Read this…
“One consequence of declining housing affordability is that young adults very often need and sometimes receive assistance from parents… The occasion for providing the assistance may be that the young couple is in or about to start a relationship”: Sackville AJA, Chaudhary v Chaudhary.
This recent NSW Court of Appeal case involved a parent’s funding of their son’s and daughter-in-law’s house purchase. The key issue was whether the funding provided was by a gift or a loan. The issue arose after the couple separated. The separation lead to Family Court proceedings being conducted alongside Supreme Court proceedings.
The case highlights the need to carefully document parent funding arrangements at an early stage of a property purchase, to avoid the risk of a costly dispute.
Let’s simplify the Chaudhary case facts from the Court of Appeal decision.
Adrian and his wife Justine signed a contract to buy a home in Drummoyne. In anticipation of buying a house and how they would fund it, they had already signed a pre-marital Financial Agreement. That agreement provided that Adrian would keep any property given to him by his parents. Accordingly, Adrian was to be the 87.5 % tenant in common owner and Justine the 12.5 % owner of the Drummoyne property.
Adrian’s father, Vincent, paid the deposit to the agent by a personal cheque and also later paid the stamp duty. After the auction, Vincent approached his contact at Westpac to arrange a bank loan for the couple for part of the purchase price. He also told Westpac he would gift $1,200,000 to Adrian and Justine. He gave Westpac his statutory declaration to that effect four days after the auction. In our experience, lending banks often insist on this to improve their lending position. Vincent changed his mind two days later however, after talking to friends and his Westpac contact.
Adrian and Justine signed and sent a formal loan application to Westpac via a broker. It attached Vincent’s statutory declaration. It stated that Adrian’s father would be gifting them up to $1.2 million towards the purchase. Westpac’s internal note, made days later, confirmed that Vincent was gifting the monies.
The couple later wrote to their lawyer (who was also Vincent’s lawyer) instructing him that Vincent was lending them $1.2 million towards the purchase and showing that Adrian’s large 87.5% share in the property was based upon that loan sum to him.
Vincent then wrote to the same lawyer instructing him to prepare a second mortgage for his loan to Justine and Adrian, which he did.
Justine and Adrian then signed the second mortgage in favour of Vincent. Although it had some wording anomalies, the second mortgage showed that Adrian was being lent the money provided by Vincent
Justine also signed an acknowledgement of the loan, as required by Westpac, witnessed by the same lawyer. It referred to the Westpac loan and the purchase being structured in accordance with the Financial Agreement.
At the settlement, Westpac provided $400,000 by a loan secured by a registered first mortgage and Vincent paid the balance of $977,714. Vincent’s various purchase payments were all secured by the second mortgage.
After the marriage breakdown, Vincent demanded repayment of the monies he had provided and commenced Supreme Court proceedings for possession of the Drummoyne home. Justine cross claimed, alleging the funds were a gift to Adrian, not a loan. She succeeded at first instance and the second mortgage was ordered to be discharged. Vincent appealed.
In the meantime, Family Law proceedings between Justine and Adrian were on foot. If Vincent’s assistance monies were gifted, Justine could bring them into the pool of assets and make a claim on them.
By an order of the Family Court, the home was ordered to be sold. Westpac was paid out and a large part of the balance (Vincent’s share) was deposited into a neutral bank account, pending the outcome of the Court of Appeal proceedings.
Family Court versus Supreme Court jurisdiction
There was an involved argument about whether the Family Court or the Supreme Court had the jurisdiction to hear the case. For reasons that we won’t go into here, the Court of Appeal determined that it did.
Loan or gift?
The Supreme Court judge at first instance held that Vincent’s payments were a gift to Adrian. The Court also concluded that even if the payments were a loan, the loan was an unjust contract under the Contracts Review Act. It ordered the discharge of the second mortgage. Vincent (Dad) appealed.
The Court of Appeal allowed his appeal. The lead judgment was given by Emmett AJA.
The deposit payment was held to be a gift by Vincent, but it was conditional on completion of the purchase contract. Its character could change by subsequent agreement by the parties before completion. The Court looked at the objective evidence of what was said and done between the three parties after the deposit was paid. It found it to be “unequivocally” clear that the payments were intended to be a loan to Adrian, payable on demand, secured by a second mortgage over their property. The Court of Appeal came to the view that Justine suffered no unjustness, as she obtained an opportunity to acquire a share in a property, but had no personal exposure to Vincent under the loan and was found to have understood the second mortgage obligations.
This litigation would have cost a fortune. If you are planning to assist your children to buy a property, consider the risk that their future partner or, if they are in business, a creditor might make a claim on the asset that you have funded.
You can elect to charge no interest. You can forgive the loan if you choose. Be aware that if you do not document the arrangement, it is more likely than not that your contribution will be deemed to be a gift and, if circumstances take a turn for the worse, those funds could be lost to you and your child.
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Surry Partners Lawyers