Is it a loan or isn’t it?
It is a common practice amongst family members, particularly by older to younger generations to lend money for the purpose of buying a first house. The nature of such loans, due to them being advanced out of love rather than commercial gain, can often mean that the exact terms and details of the loan can be vague and uncertain. These types of advances become very vulnerable in circumstances where the young couple split up. It is not uncommon for there to suddenly be a contest between the separated couple and the party (usually a parent of one of the couple) as to whether the “loan” needs to repaid and whether it forms part of the overall matrimonial pool.
In a recent Appeal Court matter, the wife claimed that the mortgage documents produced by the husband and his father were shams and designed to deny her a property settlement. The net pool of assets totalled $185,000. Due to most of those funds being held in superannuation, the couple were effectively litigating over liquid net assets of $20,000. However, in the first hearing the judge had excluded an amount of $65,000 which was effectively the proceeds left over from the sale of the former home. The judge at first instance had ordered those funds to be the property of the father-in-law on the basis that he was owed more than that amount by reason of two loans said to be evidenced by mortgages given by the father to his son in 2002, 13 years earlier (and 5 years after the couple commenced cohabitation). Those mortgages however were not immediately registered on the title of the home due to financial difficulties experienced by the husband/son.
The mortgages were registered in October 2010, notably only a few months prior to the formal separation between the parties. However, the Appeal court was particularly concerned about the inconsistencies in the evidence given by the husband and the father-in-law and between the original loan terms and the much later registered mortgage documents. The terms of loan, the amount of interest payable and how that should be calculated and the inclusion of expenses not otherwise forming part of the amount said to be owing, were all inconsistent. The Appeal court found that it was not enough for the trial judge to find that the loan was real and the interest had been properly sought, without also making a finding as to the terms of the loan and what evidence was relied on to sustain that finding. Ultimately, the Appeal court allowed the wife’s appeal and ordered that the legitimacy of the alleged loan needed to go back to another trial judge for a re-hearing.
The moral of the story is that if funds are lent the loan should be documented correctly, registered correctly and calculated and repaid in a commercial fashion.