December 2011

Financial Transactions Between Family Members

All financial transactions between family members should be properly documented. In a case involving a slightly unusual factual background, the Court of Appeal has recently confirmed that the beneficial owner of land was entitled to the profits from the development of that land, even though it may have amounted to something of a windfall as the beneficial owner had not contributed towards the development.

Factual Background

The registered owner of the land had originally purchased the land using funds provided to her by her brother. However, although the brother provided the full amount of the purchase price of $10,000, his interest in the property was not recorded on the title, with the title being taken in the sole name of the sister.

Subsequently, the sister sub-divided the land into two sections with a townhouse being built on each. The properties were sold realising a total sale price of $511,000. All of this evidently occurred without the knowledge of the brother and without any financial contribution from him towards the cost of the subdivision or the construction of the town houses.

The brother claimed that the land was held in trust for him by his sister and he was therefore entitled to an account of the profits from the development and sale the land.

The High Court

In the High Court the brother argued that as he had paid for the land his sister held it on trust for him according to well-established legal principles that establish that where the funds for the purchase of a property are provided by one person but ownership is recorded in the name of another then, in the absence of evidence to the contrary, there is a presumption that the land is beneficially owned by the person who provided the purchase money.

There was no dispute that the brother had provided the full amount of the purchase money. However, there were some unusual features of the hearing in the High Court:-

• The brother gave evidence along with some members of his family to the effect that it was always intended that he would have an ownership interest in the land.

• The sister did not give or call evidence to support her assertion that the funds provided by her brother to purchase the land were a loan (in which case her obligations would have been discharged by repayment of the original “loan” in 1995). Neither did she put the proposition that the transaction was a loan to her brother or any of the witnesses in support of him some years previously (which would normally be required).

• The brother was not challenged in cross-examination on his assertion that the land was intended to be owned by him (which was the critical issue).

• The brother had invited the sister to provide evidence of the costs she had incurred in the subdivision and developing the town houses, but she declined to do so.

Notwithstanding the above, the High Court found that the brother was not a credible or reliable witness, that his version of events was inherently implausible and that any presumption of a trust in favour of the brother had been rebutted. The Court determined that the more likely position was that the funds had been provided by the brother by way of a loan that had since been repaid in 1995.

The Appeal

The brother appealed to the Court of Appeal challenging the factual conclusions reached in the High Court and arguing that, in the absence in any evidence to the contrary, there was no sound basis for the Judge to reject the brother’s evidence or to conclude that the presumption of a trust had been rebutted.

The Court of Appeal held that where it was undisputed that the brother had contributed the full purchase price for the land with the title then being registered in his sister’s name, the presumption that the land was held on trust for the brother immediately arose in favour of the brother and remained unless it was rebutted by contrary evidence. The Court of Appeal further found that there was no sound basis for the High Court to have rejected the brother’s evidence. It was also held that there was no evidence supporting the sister’s suggestion that the brother’s contribution was advanced by way of a loan or a gift and indeed there was several factors going against such a finding.

Remedies

In terms of remedies, the Court of Appeal held that the appropriate remedy was in account of the profits. The starting point was that the sister was not entitled to benefit for her unauthorised use of her brother’s property and the measure of damages should be the gross sale proceeds. The Court of Appeal held that if the brother has now obtained a windfall (as a result of not having contributed to the costs of subdividing the site and constructing the townhouses) that was entirely a result of the decision the sister had taken in declining to take up her brother’s invitation to provide evidence of the costs she had incurred in respect of the town houses. Had such evidence been produced, then the Court may have been able to make an assessment of the appropriate allowance for the costs and efforts she had expended in improving the property.

Conclusion

Whilst there was several highly unusual features of the case, the situation could have been avoided had the brother and sister taken the trouble to properly document the arrangements between them from the outset. The case serves as a useful illustration of the problems that can arise when transactions among family members are not properly documented. Our recommendation is that all financial transactions between family members should be properly documented to reduce the chances of there being misunderstandings in the future and family members becoming involved in time consuming and expensive litigation that will do nothing to maintain harmonious family relationships!