A gift or a loan? A lender's right to change their mind

04 Sep 2017

Kemp Strang has been successful in appealing a judgment of the Supreme Court of NSW that has significant implications for lending between family members, particularly lending from parents to adult children and their partners for the purchase of a property.

In these proceedings, Kemp Strang acted for a father who in 2004 advanced the sum of $1.2m to his adult son and his then wife. The advance was made to assist the couple with the purchase of a family home. While the father’s intention at first was to give the money to his son as a gift he later changed his mind (after the exchange of contracts and prior to settlement) and decided against advancing the money as a gift. He decided to advance the money as a loan to his son. To protect the advance, the father took a mortgage over the property which was held by the couple as tenants in common with the son holding 87.5% and the daughter in law 12.5% - proportionate to their contributions. Under the mortgage only the son was liable for the repayment of the loan but both the son and daughter-in-law agreed to  provide possession of the property to the father in the event that an event of default occurred.

The relationship subsequently broke down and proceedings were commenced by the son and his former wife in the Family Court seeking orders, among others, in relation to the property of the marriage. 
Separate to the Family Court proceedings, the father commenced proceedings in the Supreme Court of NSW to enforce his mortgage to enable him to recover the principal advanced plus interest as no payments had been made to the father since the loan was advanced. In these proceedings the wife cross claimed and sought declarations, among others, that the $1.2m advance was a gift and the transaction should be set aside as it was unjust.

Campbell J at first instance held that the advance of $1.2m was a gift to the son and that the mortgage was unjust and should be set aside. One of His Honour's main considerations was that the mortgage was a "legal device to attempt to quarantine the money from the jurisdiction of the Family Court in the event of the breakdown of the marriage".

The Court of Appeal has overturned the decision of Campbell J. All three judges held that the advance of $1.2m was in fact a loan and not a gift and that the mortgage was not unjust.
The Court of Appeal noted that one consequence of declining housing affordability is that young adults very often need and sometimes receive assistance from parents (or other benefactors) to enter the housing market. The Court held that if the terms of a loan are not onerous and if the borrower or borrowers receive appropriate advice and understand the nature of the transaction, it cannot be fairly described as a "device" to avoid the operation of the Family Law Act 1975.

This case should provide comfort to parents or other parties who are considering assisting their children or other individuals with the purchase of a property.

The case also has significant commentary on the jurisdiction of the Supreme Court where proceedings are on foot in the Family Court that the Supreme Court proceedings may influence, this topic will be the subject of a later update.

A link to the full judgment can be found here.

Please contact roppolos [at] kempstrang [dot] com [dot] au (Sarina Roppolo), Partner or rodgersj [at] kempstrang [dot] com [dot] au (Jacob Rodgers), Senior Associate if you would like to know more.

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