I'm only loaning money to family or friends. Surely I don't need a loan agreement?

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There are many different situations where people might loan family or family friends money for lots of different reasons.

 

Even though loaning money may be a very supportive thing to do, it’s important to consider how you can minimise risk to yourself, what could go wrong and what could help prevent issues arising.

 

A Loan Agreement is definitely helpful for your worst-case scenario if the relationship with the person you have loaned money to goes sour or if things go off course.  Like all other contracts, the Loan Agreement is designed to set out risk allocation and responsibilities and be helpful when things go wrong.

 

So, what might go wrong?

Some people may be gifting the money but if you are expecting to be repaid either in full or in part you should put the agreement in writing. There are countless ways for issues to arise if it is unclear without a Loan Agreement in place, including that the loan was a loan to begin with and on what terms the money was to be repaid, whether interest is repayable and so on.  

 

Below are some examples where loans to family and friends can result in a legal predicament:

1.     Disagreement that there is even a loan

If you don’t have an agreement clearly outlining the terms of the loan you may find yourself having to argue that the loan even existed in the first place. This hypothetical situation became a reality for an elderly couple in the case of Berghan & Anor v Berghan [2017] QCA 236 when their son denied there was a loan between the parties and instead said that the money was a gift to him.

 

Whilst the couple ended up being successful with the Court of Appeal declaring that there was a loan and it was not a gift, the couple had to endure several court hearings (and plenty of costs) to achieve this outcome.

 

This demonstrates the issues caused by informal loan transactions between family members and proves that it is better to be safe than sorry. 

 

2.     Demands to be repaid in full

Whilst many people may focus on how much money is being loaned, it’s important to consider exactly when the money should be repaid. It is possible that the parties will end up with different expectations of when the money should be repaid if the payment terms are not clearly outlined in a Loan Agreement. Without the existence of a loan agreement the lender may be expecting and relying on a repayment and the unclear deadline is missed.

 

On the other hand, if there’s no agreed repayment dates in writing, the lender may make a demand that the entire amount is repaid immediately, and the borrower may not be able to do this. 

It is very easy for a disagreement to occur and result in a party needing to threaten legal action. A written Loan Agreement can prevent this situation and the unnecessary stress that may come along with it.

 

3.     Family Law Property Settlements

It is not uncommon for loans from family members or friends to become an issue of dispute in Family Law proceedings. For example in the matter of Liakos & Zervos & Anoy [2011] FamCA 547 the husband argued that he owed his father a principal amount of $587,000.00 plus interest which was loaned to him in separated transactions over a number of years. However, the wife disputed these loans. 

 

The Court found that the loans were not previously enforced by the father (the lender) and were not expected to be. The steps taken by the father to enforce the debts appeared to coincide with the wife’s application to the Court to divide the assets between the wife and husband.

 

Normally, in Family Law a court will distribute the net value of assets between the parties after the debts have been deducted. In this situation the loans from the father were not included as a debt to be deducted. Therefore, there was a significantly larger amount of money to be divided between the husband and wife without repayment to the husband’s father. Basically, the wife received a share of the money the husband believed was owed to his father.

 

Loans can have implications on Family Law proceedings, so it is important to have the right documents in operation to avoid this as much as possible.

 

4.     A Loan in exchange for living in a property

Sometimes people will come up with an arrangement where the lender will give a loan and the borrower will then let the lender live in their property. For example, a mother may sell her property and give some of the proceeds to her daughter with the intention that the daughter will buy a large property in her sole name with a granny flat for the mother to live in.

 

In this situation, technically the new property is solely in the daughter’s name. If a disagreement arises the daughter may try and evict the mother and deny the arrangement ever existed.

Coutts is here to help and can provide advice on the best way forward to protect an interest in property.

 

How can I protect my legal interests?

At Coutts we can assist you in negotiating and preparing a Loan Agreement or other suitable document that mitigates the legal risks and issues as much as possible. For example:

 

  1. We can prepare a written Loan Agreement which is signed by all relevant parties and outlines the terms of the loan.

  2. We can advise on the differences between secured and unsecured loan agreements.

  3. We can take you through options for security such as potentially lodging a caveat or mortgage over the property under the Loan Agreement.

  4. We can advise you on the enforcement options if the there is a dispute or default under the Loan Agreement.

 

It is important to obtain legal advice prior to entering into a Loan Agreement or entering into any form of loan arrangement. Clearly defined terms in the format of a proper Loan Agreement can help reduce the room for disagreements.

 

It is also important to know whether any time limitation periods for enforcing the loan apply.

 

At Coutts we can help with all elements of your Loan Agreement so please contact our commercial law team if you have any questions or enquiries.

 

For further information please don’t hesitate to contact:

Rebecca Watts
Lawyer
rebecca@couttslegal.com.au
02 4607 2148

 

This blog is merely general and non specific information on the subject matter and is not and should not be considered or relied on as legal advice. Coutts is not responsible for any cost, expense, loss or liability whatsoever in relation to this blog, including all or any reliance on this blog or use or application of this blog by you.