Senior Associate and Commercial Litigation Lawyer Charles Lethbridge discusses the importance of why you should document and properly formalise inter family loan agreements.
As a result of today’s ridiculous real estate prices and the seemingly impossible task for young people to pay off their mortgages, more and more, greedy children are looking for ways to rip off their parents. Unfortunately, a legal loophole is allowing children to rip off their parents and get away with it. If you’ve lent your child money and 6 years has passed since that money was loaned, in all likelihood, you will not be able to recover that money.
Commonly parents lend their children money. However, more often than not, the terms of those loans are not documented and problems arise down the track. It is important to formalise loan agreements and to make sure they are correctly documented. Unbeknownst to most (even many lawyers), if written loan agreements do not contain certain provisions, mum or dad run the risk of not being able to recover their money if things go sour!
The problem arises because often it is agreed that the money which is being lent must be repaid whenever mum or dad demands it. At law, such loans are ‘repayable on demand’, which may seem simple enough. You may therefore think that if something happens and dad wants his money back, all he has to do is to demand it. However the time for recovering a debt (for the purposes of limitations law) runs from the time the loan is made – not from the time the demand is made. So if such a loan was made more than 6 years ago, you may not be able to recover that debt because your child may raise the defence you are barred (out of time) to recover such debt.
This is because a loan of money which contains no agreed repayment terms becomes continuously recoverable at all times, therefore, any cause of action arises the instant the money is lent which means that the clock for recovery of the debt starts running as soon as the money is advanced and the timeframe for recovering is normally 6 years from that date under the various state limitation periods (see QLD Section 10 and NSW Section 14).
Unsurprisingly, professional lenders such as banks or other financiers ensure their loans are well documented with carefully stated repayment terms.
How to get out of trouble
- If you have made a loan to a family member (or to anyone) that has not been documented there may still be some steps you can take to avoid adverse consequences, especially if the loan was made less than 6 years ago. Such loans should be immediately properly documented.
- If money has been loaned with no payment terms or is ‘payable on demand’ the lender should seek a signed acknowledgement of the debt from the debtor before the expiration of 6 years from the date of the loan (most Australian states’ limitation of actions legislation provide that time will start to run again if a debtor acknowledges the debt).
- Lenders should describe the loan as repayable 7 days (or another nominated period) after demand is made to ensure that time runs after a demand is made rather than upon the advance.
- Parents lending money to their children should also review their wills and make provision for the loan to deducted from their child’s inheritance in the event it is not repaid.
Attwood Marshall Lawyers recently acted for a lady who lent her son a sum of money subject to a loan agreement drafted by a lawyer which contained a provision that the debt was repayable on demand. The lady demanded repayment of the money, however her son refused to pay her. The client was out of time (6 years had elapsed since the agreement was signed). Fortunately, she was successful in recovering the money with a professional negligence claim Attwood Marshall Lawyers commenced on her behalf against the lawyer who drafted the loan agreement.