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For some - Neither a borrower or a lender be, for others - All's Well that Ends Well

31 August 2017

Two recent cases have high-lighted how important it is to clearly agree on and document the terms of an advance to someone else for the purchase of a property. Not only is this important because a written record reduces the likelihood of misunderstandings, but also because the law makes certain presumptions about these advances depending on the circumstances and the relationships between the parties. These presumptions can have a bearing on the outcome if there is a dispute later.

A loan or a share in the property?

Whether the advance is intended to be a loan or give the person advancing the funds a share in the property can be hugely significant in times of rising house prices.

In the case of Chang v Lee [2017] NZCA in 2011 Mr Chang advanced $275,000 to his niece Ms Lee to purchase a property in Auckland. The advance was not a gift, but there was no clear agreement on the terms of repayment. Mr Chang made the advance on the understanding that he could work for 10 years on a well-paid role for Mrs Lee’s mother’s company. When Mr Chang’s employment ceased he sought the sale of the property and claimed a share of it.

In the High Court the judge applied 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. The judge found that there was no evidence that Mr Chang expected to be a co-owner of the property so he was not entitled to share of it. However, he was entitled to repayment of the $275,000 he had paid towards its purchase.

The Court of Appeal found differently and declared that 48.6% of the property was held by Ms Lee on “resulting trust” for Mr Chang. There was no need for Mr Chang to show that he expected to be a co-owner of the property – all he needed to show was that he had not intend to part with ownership of the funds. The Court was not prepared to do what the High Court judge had done by finding there was a loan and imposing on the parties terms of lending where none had been specifically agreed.

As a result, the Court ordered that the property must be sold by 1 January 2018 and Mr Chang be paid his 48.6% share. Undoubtedly 48.6% of the value of a property in Auckland in 2017 will yield Mr Chang a much greater amount than if he was to be repaid a loan of $275,000 made towards its purchase in 2011.

A loan or a gift?  The “Presumption of Advancement”

There is another legal presumption that is made where funds are advanced by a parent to a child and which can result in significantly different outcomes for the parties. The law presumes that a transfer of property from a parent to his or her child is a gift.  When a parent buys a property and it is conveyed into the name of his or her child, it is presumed that the parent intended to make a gift or advancement to the child of that property. This presumption may be rebutted by evidence that there was no intention to make a gift. It does not apply where the advance is to the child’s spouse. If the presumption of advancement does not apply then the person claiming there was a gift and not a loan must prove that fact.

In the other recent case the presumption of advancement did not apply. However, a daughter-in-law claimed an advance of $910,000 by her husband’s parents towards the purchase of a property was a gift and not a loan. The daughter-in-law had separated from her husband and they were involved in a relationship property dispute. For obvious reasons, the husband took his parents’ side that the advance was a loan. The daughter-in-law was unsuccessful because the evidence did not show the advance had been intended as a gift.

A word of advice

The high cost of property ownership means that family members often advance funds to other family members to make it possible for them to purchase. This can be an admirable thing to do – if the terms of the advance are agreed on and recorded clearly.

 

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.

 

Barbara McDermott