Importance of getting legal advice before lending money to someone

Clients A and B lent money to one of their children, for ease referred to as C, to purchase a property with their spouse. We advised the clients that they should obtain legal advice before lending any money and urged them to have a loan agreement drawn up and signed by the parties and register a mortgage over the property.

We explained the considerable risk to Clients A and B of lending the money without any legal agreements in place. Clients A and B did not want to spend money on legal fees and said they trusted that C and their spouse would repay the loan back. They did not take our advice.

A few years later C and their spouse divorced. The divorce went through the Family Law Court and turned very messy. C’s spouse successfully argued that in the absence of a loan agreement or registered mortgage, that the money given to C by Clients A and B was a gift. As such the Family Court did not consider the funds lent to C a loan that was to be repaid from the proceeds of the sale of the property. This meant that the proceeds remaining from the sale of the house was to be split between the C and their spouse.

This meant C’s spouse walked away with half of the remaining proceeds of the sale and Clients A and B only got repaid some of their funds back from C’s shares of the net proceeds from the sale of the property.

Clients A and B were annoyed at themselves for not taking our advice and not wanting to pay a little bit of money to have the formal legal documents drawn up before they lent the money to C. If they had done so, they would have been repaid all of the money they lent to C.