The dangers of lending to loved ones

Given the costs associated with the acquisition of real estate in the current market, it is becoming common for parents to advance funds (unsecured) to their children in order to assist them in buying their first home. The funds advanced usually form part of, or all of, the deposit for the property, which assists their children obtaining finance to purchase the property. For the most part, these arrangements go to plan. But what happens if the plan fails?

In a scenario where the owners of the land are registered as Joint Tenants, and one of those owners becomes bankrupt, the Trustee in Bankruptcy will seek to deal with the estate’s interest in the property. Should this situation arise, the parents (or certain limited other relations) who advanced the funds to allow for the property to be purchased in the first instance, often seek to claim as a creditor of the Bankrupt Estate. More often than not, they also seek to claim some equitable interest in the property on a resulting trust basis. This is on the premise that the property could not have been purchased without the funds having been advanced by the related party in the first instance.

In circumstances such as these, the Trustee in Bankruptcy is entitled to rely on the presumption of advancement. The presumption is that in the absence of documentation or other evidence which confirms the actual intention of the parties at the time the transaction is entered into, the funds advanced were intended to be a gift. The onus in this case would be on the parents to rebut this presumption. If the parents are unable to rebut the presumption, they will not be able to maintain any equitable claim in the property. Further, they will not be considered as creditors of the Bankrupt Estate.

It is also noted in most cases, that in applying for a mortgage, there might be other documentation that identifies the advance of funds as a gift. It is not uncommon for a bank to see a declaration from the borrower that the deposit funds are a gift. That would add further weight to the Trustee’s position that the related parties do not have an equitable claim in the property, nor would they be creditors of the Bankrupt Estate.

The presumption of advancement also applies to unsecured lending. Absent documentation being prepared to record the terms of any loan, if challenged, it will become the obligation of the lender to rebut the presumption and to prove their position as a creditor of the Bankrupt Estate.

If parties are seeking to provide funds to their loved ones to assist in the acquisition of any real property, or any other assets for that matter, it is imperative that those terms are documented at that time. A better approach is to obtain some security, such as a mortgage or other Personal Property Securities Register, and ensure those security interests are registered at the time the loan documents are executed.

Please remember, it is important to see your solicitor for advice with respect to your individual circumstances.

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