Family Property Arrangements - Part 1
In this article, which is the first of a series of articles on family property arrangements, we focus on arrangements whereby parents lend money to their adult child (and/or their partner) to assist with the purchase of a property. Other types of family property arrangements will be discussed in subsequent editions.
Ownership of the Property
If title the property is taken in the names of all parties who have contributed funds towards the purchase in shares proportionate to their respective financial contributions, then there is obviously a degree of security for the parents because they will in turn receive a proportionate share in the ownership of the property itself. However, that is not necessarily the end of the matter. Often it will be the case that the parents are intending only to make a contribution to assist with the purchase of the property but are not intending to be a party to any of the borrowings undertaken by the children to assist them to purchase the property. However even if that is the case the bank will still require a mortgage over the whole property. Therefore, the parent’s share of the property remains at risk, even if they are not borrowers, in the event of a default under the child’s loan agreement.
Security Issues if Property Not to be Owned Jointly
If the property is not to be owned proportionately by all parties contributing funds towards the purchase of a property, the issue of security for contributions made by the parents needs to be considered carefully. In the past, this was often addressed in the form of “security” being provided by way of an agreement to mortgage in favour of the parents in respect of funds that they had contributed with the parents registering a caveat against the title to the property. Another alternative that was used in the past involved the parents taking a second mortgage over the child’s property. These days, if parents wish to make a financial contribution but not take a share in the ownership of the property, the funds may have to be gifted. This creates the obvious difficulty that if funds are gifted, they cannot then be recovered subsequently should circumstances change.
Recognition of Ongoing Financial Contributions
Issues relating to ongoing financial contributions to the property may need to be considered. For example, it may be necessary to consider how expenses in relation to the property such as mortgage repayments, rates, insurance, maintenance, capital improvements etc are to be shared between the parties.
In situations were the arrangement is intended to be one of ongoing shared ownership, it is even more important to give consideration as to how ongoing financial contributions towards the property are to be treated. One party may not be particularly willing to make ongoing contributions towards the property (particularly if they do not live on the property). A further issue that can sometimes arise is where one of the parties (typically the party occupying the property) wishes to make improvements to the property but the other does not. Consideration needs to be considered as to whether or not all owners would contribute to such expenses and if so, in what shares.
Selling the Property
The third phase of property ownership that needs to be considered is the eventual sale of the property. In situations where the parties own the property jointly, problems can sometimes arise if one party wishes to sell the property but the other does not. A typical situation that might arise would involve the parents wanting to realise their interest in the property for their own purposes, such as to raise funds to purchase a unit in a retirement village, but the child may not have the necessary funds to buy out the parents’ share.
In general terms, only a party who owns a 50% or greater share in the property can force a sale of the property by way of an action for partition under the Property Law Act. In a situation where the parent has made a contribution to the property by way of a bare loan without taking any form of the ownership of the property, it would be difficult for the parent to force a sale of the property, even if their contribution equated to more than half the value of the property. Furthermore, in such situations there is nothing to stop the child selling the property without accounting to the parents for their financial contributions in such circumstances.
In the event that a jointly owned property is sold, there obviously needs to be arrangements made for the distribution of the sale proceeds among the owners. In some circumstances, division in direct proportion to the parties’ shares in the ownership of the property may be appropriate. However in other circumstances, particularly where one party has made contributions greater than their proportionate share, this may not necessarily be the case.
As can be seen from the above, arrangements between parents and their children in relation to property raise a number of important issues that need to be considered. Failure to properly consider these issues and document the relevant arrangements can lead to financial loss and family disharmony.
In articles to appear in subsequent editions of this newsletter, we will consider the issues that arise when parents move in with their adult children, when siblings purchase property together and the steps that can be taken to reduce the chances of problems arising.