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Equity operates on conscience of legal owner of property

24 June 2016

There is a principle of law that states: where a person pays over a sum of money towards the purchase of land without getting his or her name recorded on the title as one of the owners, equity presumes that the person paying the money did not intend to make a gift and that the registered owner holds the property in trust for the person who provided the money. This presumption may be rebutted if there is evidence to the contrary.

No written agreement for payment of $275,000

This principle was applied in a recent case (Chang v Lee [2016] NZHC 1040). Mr Chang had paid $275,000 towards the purchase of a house by his niece, Ms Lee at the request of his sister-in-law, Ms Chang, the mother of Ms Lee. The house was purchased for $566,000. Ms Lee was the registered owner. No receipt was given for the payment of $275,000 and no written agreement was signed recording Mr Chang’s interest in the property.

Mr Chang brought these proceedings and asked the Court to find that Ms Lee was conscience bound to hold the property on trust for him to the extent that the $275,000 payment he had made bore to the total price of $566,000. Mr Chang sought a sale of the property and payment of his share of the sale proceeds.

Ms Lee argued that either the $275,000 payment was a gift to her to satisfy a debt owed by Mr Chang to her mother, or that the payment was made as a set-off against numerous payments made by her mother to Mr Chang to reduce his debts. Mr Chang had a completely different view of the arrangement. His view was that Mr Chang was to borrow the money against a property he owned on the basis that Ms Lee’s mother would engage him as an employee for 10 years on a generous salary. Unfortunately the transaction was completed in haste and the financial details were not finalised later as anticipated at the time of the payment. The facts did not support a legally binding contract for the arrangement so neither Mr Chang or Ms Lee used this argument to support their claims.

Court finds existence of a trust – owner required to repay $275,000

The judge referred to the relevant principle of law and traversed the lengthy chronology of the dealings between Mr Chang, Ms Lee and her mother.  He found that Mr Chang was not legally indebted to Ms Chang for the amounts she had paid for his debts so Mr Chang’s payment towards the property could not regarded as repayment of his debt to Ms Chang. The judge observed that families do assist each other and such assistance is often reciprocated. However, the law of equity does not generally impose obligations in these circumstances. The judge also referred to the equitable principle: “He who comes to equity must do equity”. As the evidence showed that Mr Chang had no expectation that he would be a co-owner of the property, then he was not entitled to a share of it. However, he was entitled to repayment of the amount he had contributed to the property. The result was that Ms Lee and her mother held the property on trust and were conscience bound to recognise that the payment of $275,000 was a loan for no more than 10 years. Repayment of the loan was to be a charge against the property in favour of Mr Chang.

Agree on the terms and record the arrangement in writing

Disputes often arise because the parties are family members or they may be on good terms at the time they are making their arrangements. They do not see the necessity to finalise all the terms and record the arrangement in writing. Paying money towards the purchase of a property, particularly where it might increase in value substantially, is obviously one situation where a written record of the arrangement is necessary to avoid the angst and cost of a dispute later on.

 

Please email me at barbara.mcdermott@nwm.co.nz with your ideas for future articles. Keep an eye out for next month's column, where I will discuss another relevant rural legal issue.


Barbara McDermott is a partner of Norris Ward McKinnon, specialising in commercial and rural law. With offices in Hamilton and Huntly, we have friendly, expert legal advisors ready to help you with your business and personal legal matters.