The recent increase in young buyers using funds from mum and dad was sharply in focus in recent NSW Court of Appeal decision which highlighted the importance of parents having a properly written agreement with their children, particularly in the case of marriage breakdowns.  In Chaudhary v Chaudhary [2017] NSWCA 222, a father signed a statutory declaration as part of a bank loan obtained by his son and daughter-in-law stating that the funds he advanced towards the purchase were a gift that would not be recalled.  The father later paid the stamp duty and advanced a further amount, meaning that he advanced over $1.2 million in total as part of the transaction.

An interesting detail was that the son and his wife signed a binding financial agreement under the Family Law Act specifically addressing how inheritance and gifts would be treated if their relationship ended.

Prior to settling on the purchase, the father discussed with his son what would happen to the $1.2 million he had advanced if the son and daughter-in-law separated.  They agreed that the entire advance of $1.2 million should be secured by a second mortgage. The father then consulted his solicitor who drafted the second mortgage over the property and, crucially, the daughter-in-law signed the mortgage documents stating that she accepted the funds were a loan and repayable on demand.

The Court relied on correspondence with the family’s solicitor and the drafting of a second mortgage to override the effect of the statutory declaration made to the bank.  The Court held that while the statutory declaration was an accurate record of his intention at that time, it did not mean that the further funds he advanced later were also a gift.

The Court found that many families may not have resolved whether advances toward purchasing the property are a gift or a loan at the outset, but that written intention will prevail – in this case the second mortgage superseded the statutory declaration.

This case highlights the importance of written agreements and while recognising that intentions can change, these changes must be recorded in writing – even in the case where money is offered without requiring scheduled repayment or interest. These records become crucial when relationships break down, particularly in the absence of prenuptial binding financial agreements.

Katherine Wiltshire