Family law case a reminder to parents to document loans to children

High house prices and stringent bank lending criteria are making it increasingly difficult for first home buyers to enter the property market in New Zealand.  Our firm has seen a corresponding rise in clients seeking to assist their children or other family members to purchase a family home by advancing funds for a deposit or acting as a guarantor on the mortgage.

If your child is in a relationship care should be taken to avoid your money being drawn into a family law property dispute if the relationship breaks down, as demonstrated by the recent High Court decision of Zhang v Li [2017].   The husband in that case claimed that $335,500 advanced by his wife’s parents to his wife to purchase the family home was a gift.  The husband claimed he was entitled to half.  A gift to your child may be “relationship property” if applied to the family home or other relationship assets.  Under the Property (Relationships) Act 1976 (the PRA), after a relationship of three or more years, relationship property is divided equally between the spouses or partners with limited exceptions.

The parents in Zhang v Li could have reduced the risk of expensive court proceedings to recover their funds by putting in place a comprehensive loan agreement specifying the terms of repayment.  If you are considering making a loan to your child to buy a home our property and real estate experts can tailor an agreement for you.

Why is a loan agreement important?

In law there is a presumption that an advance from parents to children is a gift and not a loan.  The presumption can be rebutted by evidence showing that at the time of the advance, there was no intention by the donor to transfer beneficial ownership of the property to the donee (the party receiving it).  A comprehensive loan agreement is strong evidence.

In Zhang v Li the parents did not document the advance to their daughter so the Court was left to consider the circumstances of the advance in order to determine the parents’ intention.  The Court held that the advance was a loan and referred to the following factors which were key to its conclusion:

  1. Representations – the Court accepted that the parents had not stated that the advance was a gift.
  2. The size of the advance – The monies represented a large part of the parents’ retirement savings making it unlikely they would have intended to gift the funds at that time.
  3. The reason for the advance – The money was advanced to the daughter for the specific purpose of helping her acquire the family home. The parents intended to share the home with their daughter upon relocating to New Zealand in retirement.
  4. Cultural factors – The Court accepted expert evidence that documenting intra-family advances such as the one in this case would be considered disrespectful in Chinese culture. The lack of a loan document did not mean the parents had intended to gift the funds.

The parents were successful with the Court ordering repayment of the loan but the result could have been different.  In the absence of documented terms, an advance which is not a gift will be characterised as an “on demand loan” (repayable on demand).  Under the Limitation Act 2010 the lender of an on demand loan has six years from the date of the advance to bring a claim for repayment with some exceptions.  After this time a claim for repayment may be statute barred and the loan may not be recoverable in family law or other proceedings.  If you are concerned about a loan you have made we can advise you about securing your right to repayment.

Going guarantor

If you are considering acting as guarantor for a loan to your child, we strongly recommend that you obtain legal and financial advice before doing so.  There are many aspects to be aware of before making that commitment.

How we can help

A tailored loan agreement can reduce the risk of your funds being the subject of a family law claim.  For increased protection, it may be complemented with a “contracting out agreement” between your child and their spouse under section 21 of the PRA.  A contracting out agreement can specify how the advance will be repaid in the event of separation or, if it is a gift, that your child will retain those funds as their separate property.

Our firm has experienced family law and property and real estate practices.  We welcome the opportunity to advise you about property transactions, loan agreements, relationship property claims and contracting out agreements so you can help your child into the property market with confidence.

Additional author

Sarah Moore, Senior Solicitor

Sarah has extensive experience advising clients on a wide range of family law matters. Her expertise includes managing multi-million dollar tax-complicated property and trust disputes in New Zealand and Australia.

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