Posted on July 26, 2021
Hanna Psomoulis
Loans between related parties including between parents and their children – colloquially coined ‘transactions with the bank of mum and dad’, are recognised as being one of the highest risk lending transactions one could engage in. Yet, they are also quite common – and perhaps in the context of the recent economic climate and increased property prices – an option elected by many parents.
It is all important for parties entering into lending arrangements to be fully informed of matters pertaining to the transaction and take all proper steps and precautions so as to mitigate the inherent risks.
The following is a non-exhaustive list of steps which you may consider when entering into such a transaction:
- The need for each party to obtain independent legal advice;
- Ensuring the agreement is made on commercial terms;
- A consideration of the availability of adequate security; and
- Taking further steps to protect your interests.
Receiving independent legal advice
Engaging in transactions perceived as being informal too often lead to informal processes being used. Such an approach lends itself to claims of misconduct arising including claims of receiving misinformation, holding an incorrect or inadequate understanding as to the purpose and terms of the transaction, and other allegations of fraud, coercion, deception and abuse. One key means by which to reduce the potential for allegations of this nature being made is to receive independent legal advice as to the transaction.
Seeking independent legal advice ensures that you can be confident and fully informed of the transaction you are entering into, and are able to ask and receive answers to questions you may perhaps be uncomfortable to ask, or be unaware you should ask!
Entering into a loan agreement can have flow-on consequences for your estate planning, taxation and family law matters.
Ensuring the agreement is made on commercial terms
It is important that a loan agreement sets out clearly in writing the commercial terms of the agreement so as to ensure that both parties have sufficient certainty as to its terms. You cannot underestimate the importance of the terms reflecting a arms-length transaction.
Where terms which are less favourable than commercial terms are used, the transaction and the parties to the transaction may be left exposed to allegations of unconscionable conduct or undue influence.
Further implications may arise when property is transferred on non-commercial terms. One such consequence may be the presumption of advancement arising under property law, which presumes a transferor intended a transfer to be a gift and not a loan.
Ensuring adequate security is available
When entering into a loan agreement involving security it is important to have a complete and up-to-date understanding as to the nature of the asset securing the loan.
Valuations, proof of insurance and searches – including title searches and searches on the Personal Property Securities Register (PPSR), may be sought to secure the assets to be secured by the loan and to better understand your entitlements should the assets need to be recovered.
Taking further steps to protect your interest
There are a number of steps you are able to take to better protect your interest under a loan agreement. These include registering your interest against the security whether by mortgage or caveat, or on the PPSR. Registering your interest in this way allows you to rest assured that your interest is duly recorded but also brought to the attention of any subsequent creditors and other parties interested in the security.
Concluding words
The bank of mum and dad can be one of the biggest transactions that you enter into besides the purchase of your own home. Don’t create problems, if you are considering entering into a related party loan or have entered into one already please do not hesitate to contact our office on (03) 9583 0311 to speak with Sharelle Staff or Emma Munday at Scanlan Carroll.
For further information on how loans between parents and children may be treated upon a breakdown of the child’s relationship with their partner and a subsequent property division, perhaps review our blog post titled: ‘Gifts in property settlements— a simple science?’ which can be accessed at the following link: https://scanlancarroll.com.au/gifts-in-property-settlements-a-simple-science/
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