Due to increasing house prices in the eastern capitals, parents frequently financially assist their children and their partners to take their first step on the property ladder. Assistance from parents may include providing a deposit or more of the purchase price, covering the mortgage repayments or becoming a guarantor and placing an additional mortgage on their property.
Difficulties can arise if the couple later separate and disagree on a fair division of their property. One former spouse may claim a debt to their parents or wish to have the financial contribution by their parents reflected in the property division. In some circumstances, a parent may become a party to legal proceedings between spouses in order to retrieve their financial contribution.
In the case of Pelly and Nolan [2011] FMCAFAM 530, the husband had borrowed $250,000 from his father to purchase a property and after selling that property, borrowed a further $70,000 to purchase a second property. The husband did not pay back the loan and had not been charged any interest. However, his father had prepared an unsigned loan agreement in relation to the initial loan of $250,000. This agreement stipulated a higher amount of $290,000, but the husband had sold some shares and paid $40,000 back to his father previously.
The husband and wife could not agree on how to divide their property, including whether or not the husband’s loan from his father should reduce the value of the property to be divided. Pursuant to s 79 of the Family Law Act, the court may adjust ‘interests in property’ if it is just and equitable to do so. Having reference to the decision in Biltoft and Biltoft (1995) FLC 92-614, the Full Court determined that the husband’s loan from his father was a gift and would not reduce the property pool in this matter.
It is important to distinguish between a loan and a gift. Often a loan from a parent is not enforced or likely to be repaid, so the Family Court will view this money as a gift. Spouses considering borrowing money to purchase property should take steps to avoid legal uncertainty in the event of a relationship breakdown.
Written by James Moore, Associate
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