Love and loans (Part 1) - borrowing from the Bank of Mum and Dad

1. A layman’s guide to Intra-Family Loans.Financial transactions within families can be fraught with difficulty, often because the arrangements are handled in an informal way and then the parties have a falling out. Don’t take for granted that the happy family today will continue on that way.1.   All family relationships must end at some point in timePrevention is better than cure. Family relationships are dynamic, marriages are occurring at later ages while living together has become increasingly common, as are blended families.The concept of a relationship breakdown is also broader than separation and divorce; it may be a process that can be gradual or abrupt or occur well in advance of any separation. Then again, it may be a serious illness or a death in the family, rather than a relationship breakdown, that renders the assumptions underpinning any intra-family Loan(s) irrelevant.Both the lender(s) and the borrower(s) owe it to each other to be open and transparent about any proposed financial arrangements between them and would be well advised to seek professional advice before entering into any loan agreements with other family members. This is in order to avoid any later suggestion that the financial arrangements between them were tainted or can in some way be impugned.2.   Avoid conflicts of interestLawyers are sometimes asked to act in transactions where parents lend money to their children to help them buy a house. The issue for all concerned is: who is the lawyer acting for? In such situations there is a conflict of interest, which may not be immediately apparent to either the parents or their children.A conflict of interest arises when the concerns or aims of two different parties are incompatible.If the lawyer is acting for the child in the purchase of a property or a business loan, he or she should recommend that the parents obtain their own independent legal advice and must tell the parents that they cannot advise them in relation to the financial merits of the transaction because, in the event something unforeseen occurs, the commercial basis for the purchase or loan may later be challenged.Alternatively, if the lawyer is asked by parents to document a loan to their child, he or she needs to make it clear to the child that they are not acting for them and ought to recommend to the child that they obtain their own independent legal advice.3.   Document the loanWe strongly recommend that a loan document is prepared that covers all the things that an arm’s length transaction would cover even if the parties just want a basic document covering the terms they had discussed between them. DTCH can assist you in the preparation of loan documentation.4.   Independent Legal AdviceKeep a record of your legal advice. Both the Lender(s) and the Borrower(s) may wish to obtain a solicitors certificate which must comply with rule 11 of the Legal Profession Uniform Legal Practice (Solicitors) Rules 2015 and be in the form specified by the Law Institute of Victoria.5.   SecurityAny loan ought to be secured, although this may not always be possible. There may be circumstance beyond the control of the borrower that affects whether the parents’ loan is protected. For example, the child’s domestic relationship may break down and the equity they have in the property may be lost in a property settlement.The borrower may become bankrupt and lose the property unless you have a registered security interest. In the event of the parents’ death or insolvency there could be beneficiaries or trustees in bankruptcy who may take issue with the Loan agreement and allege that you have not acted appropriately.6.   PPSRFor the purchase of some assets, it may be appropriate to undertake a search of the Personal Property Securities Register (PPSR). The PPSR is a national online register that can provide information to help protect consumers when they are buying personal property such as cars, boats or artworks (not including land or buildings).If you check the PPSR you can find out if the personal property you are buying has a security interest already attached to it. This is important because if you buy property subject to a security interest, it is possible that the person or entity with the security interest may have a prior claim that will defeat your security interest.About DTCH Lawyers:DTCH Lawyers owes its origin to the firm of Donaldson Trumble Lawyers which began in 2001, and brings together a wealth of knowledge and wisdom across many areas of the law.Most legal work involves making choices. Not just what to do, but how and when. Each choice has costs and consequences. Each client has different expectations and needs to be addressed so that the client makes choices that are the best for the client, given the circumstances and the information known when a decision is made.For this reason, we value long term client relationships. Knowing what a client has done – and why – helps in advising that client when next they need a lawyer.Unlike many other law firms who divide according to their areas of practice, DTCH Lawyers aims to provide a client focused approach, by aiming to provide all the legal services our clients require.In other words, rather than needing to consult a range of different specialists for each legal issue, your DTCH lawyer should be able to provide assistance in the range of legal areas relevant to you. Ideally, you only need to deal with one person at the firm and you do not pay for the double handling inherent in teams of specialist lawyers.For a preliminary discussion in relation to any proposed intra-family loan, please contact David Brett at DTCH Lawyers.