A long-standing client calls to say their son is buying his first home. The parents want to help with a $200,000 loan and would like the firm to handle both the purchase and the loan documentation. The parents and son have a good relationship. Everyone agrees on the terms. What could go wrong?
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| If the loan is not documented and enforced as a genuine arm's length transaction, a family court may disregard it entirely when assessing matrimonial property, leaving the parents with no protection. And the solicitor who acted for both sides without managing the conflict is likely to face a claim from one or both. | ||
Pick a side at engagement
The parents and the child have different interests, even when the relationship is strong. If the marriage breaks down, or the child cannot repay, each party will look to the legal practitioner who acted for them. If the same practitioner acted for everyone, that practitioner becomes the target.
Most firms acting in this area now act for one side only. At the point of engagement, before opening the file, decide to either act for the child in the purchase, or act for the parents in documenting the loan. Do not act for both.
If acting for the child in the purchase:
Send a letter to the parents at the time of engagement confirming the firm does not act for them and recommending they obtain independent legal advice about the loan.
If acting for the parents in documenting the loan:
Send a letter to the child at the time of engagement confirming the firm does not act for them and recommending they obtain independent legal advice before signing any loan documents.
Record the conflict assessment and the referral letters on the file.
Enforcement matters: Han & Han
In most instances parents will want to ensure that the money they are giving their child is protected in the case of a marriage breakdown or bankruptcy. The case of Han & Han [2026] FedCFamC1A 54 (Han & Han) shows that there must be evidence the loan will be enforced.
The facts
Han & Han is a family law property dispute case in which the husband alleged he had borrowed about $1.8 million from his mother and her related companies in around 2003. By 2022, when the loan was called in, the total debt was approximately $4.66 million. The husband contended this liability should be considered when assessing the matrimonial assets.
Based on a charging clause in the loan agreement the loan was purportedly secured by way of a caveat over land since 2007 and interest had been requested since 2019. The loan agreement provided that the husband would sign a mortgage if requested to do so by the lenders. No mortgage was ever signed. The husband and wife were married in early 2018 and separated in December 2021.
The decision
The court held that it has significant discretion under section 79 of the Family Law Act 1975 (Cth) (Act) to assess and deal with liabilities of the parties. The existence of security for debts (such as a caveat or registered mortgage) is not conclusive as to how the liabilities should be treated. The court must consider whether it would be unjust and inequitable to take the debt into account by considering:
- the nature of the liabilities
- the circumstances in which they were created
- the closeness of the parties
- the likelihood of repayment being required.
The facts in this case suggested the loan was never going to be enforced because:
- there had been no attempt to enforce the loan until 2022, after the couple had separated
- no proceedings had been issued even though the loan was in default.
The court found that it was unjust and unfair to assess the matrimonial property with a net value of $4.66 million less than it truly had, given the debt was unlikely to be enforced.
Risk Management
At the time of providing initial advice to parent-clients, take the following steps.
- Provide the LPLC’s client brochure Parent to child property… - Legal Practitioners' Liability Committee at the first meeting or with the cost agreement. The brochure explains in plain language the pros and cons of gift and loan arrangements and will supplement the oral advice referred to below.
- Parents who wish to advance money to their child and protect it from future matrimonial property disputes need to be advised in writing by their solicitor. In that advice, consider whether it is appropriate to cover the following points:
- They need to treat the arrangement as a formal loan, preferably naming all registered proprietors of the security property as borrowers.
- Make it clear who the solicitor is acting for and who the solicitor is not acting for.
- The loan agreement needs to make it clear when and how the loan is to be repaid and how the debt will be secured.
- Any provisions in the loan agreement need to be enforced, such as interest payments and repayment dates.
- If the loan expires and the parties don’t want it immediately repaid, a new agreement should be entered into. Don’t just let the earlier agreement lapse.
- Security for the debt needs to be registered on title, preferably a first mortgage, but if a second mortgage is the only option, there may be difficulties getting it registered if the first mortgagee does not consent and there may not be enough equity left to secure their loan.
Key takeaway
A parent-to-child loan that is not documented, secured and enforced as a genuine loan arrangement, may be disregarded entirely in a family law property settlement. The practitioner who acted for both sides, or who did not advise the parents of this risk in writing, is exposed to a claim from whichever party is disappointed by the outcome. Pick a side at engagement, document the loan formally, and confirm the advice on the file.
