Law Talks Episode: Granny Flat Agreements – what families need to consider before living together

Robyn: Good morning and welcome to another edition of Law Talks here on 4CRB where we discuss some of the common legal issues our community face.

With the current cost of living crisis, it comes as no surprise that the popularity of the granny flat continues to rise. However, as seen in a recent story published by the Gold Coast Bulletin, these types of arrangements aren’t always straightforward.

Joining us today, we have Attwood Marshall Lawyers Senior Associate and Accredited Aged Care Professional, Larisa Kapur, an expert in Wills and estates, elder law and aged care. Larisa is going to discuss the recent court case with us and provide some advice about how to avoid this happening to you if you are thinking about entering a granny flat arrangement with a family member.

Thanks for joining us, Larisa.

Larisa: Thank you for having me.

Robyn: Larisa, what can you tell us about the recent court case involving a local couple and a granny flat arrangement?

Larisa: So, this case involved a couple who were ordered to pay one partner’s mother $420,000 in compensation after breaking an agreement they had made, allowing her to live with them for rent free.

Shannon lived with her husband Brett, and had agreed that her mother, Bonnie, could also live with them for the remainder of her life. So, in 2015, Bonnie, Shannon and Brett entered what seemed like a harmless family arrangement.

Shannon and Brett purchased a home in Ormeau for $825,000. Bonnie contributed just over about $270,000 towards the purchase price and to fund the conversion of the detached garage into a granny flat for her to live in.

So, the agreement was that Bonnie would be able to live there, rent free in the property for her lifetime. She wouldn’t have any ownership over the property, so she wouldn’t be on the title, the home or share in any of its capital gains. So, if Shannon and Brett decided to sell and move, Bonnie would go with them on the same living arrangement in a new home.

Robyn: Okay.

Larisa: So, the relationship soured. In 2023, Shannon texted her mother asking her, you know, to buy her out of that property and offered her $250,000.

So, Bonnie the mother refused because the market had changed dramatically since 2015, and it would cost her far more to re-enter the property market than what she had originally contributed. So, Shannon and Brett argued that they only needed to repay Bonnie’s initial contribution. But the judge in this circumstance found that this wouldn’t be fair, and ultimately the court ordered for them to pay Bonnie over $420,000.

Robyn: Wow, what a costly legal dispute to have to go through to reach a fair outcome. And one that no doubt serves as a cautionary tale for anyone thinking of entering a family arrangement like this one.

Larisa: Oh absolutely. So, these type of family arrangements often start with the best intentions, so everyone thinks it’s a win-win.

But without proper documentation and planning they can end in a bitter, bitter legal battles. So, lose-lose for everyone.

This case highlights the importance of formalising agreements even within families, to ensure that everyone is on the same page from start to finish.

Robyn: So, Larisa, how do families go about formalising these types of arrangements?

Larisa: The best way for this situation is to create a granny flat agreement. So a granny flat agreement is a formal arrangement between a property owner and another party, usually between a parent and their child, to transfer an interest in property or money in exchange for accommodation for life. So, it’s important to note that a granny flat interest only lasts your lifetime, so it’s not considered part of your estate upon death and cannot be included in your will or passed on to a loved one.

Robyn: Okay. So, how complex are these documents to put together? Is this something people could draft up themselves and just have both parties sign?

Larisa: Wow. So, while granny flat agreements might seem straightforward, they are more complicated than you might think. So, Centrelink recommends that anyone entering this type of agreement have a legal document drawn up to provide proof of the agreed terms.

Not all lawyers are familiar with these documents either, so a lawyer who practises in this area will understand the information that should be included in the agreement and can offer advice to ensure that both parties understand the terms they’re agreeing to. It’s also important to see someone who knows what they are doing to get the right advice. Particularly, because if you are receiving a pension, there could be significant impacts on your pension if you’re transferring or putting money into someone else’s property.

Robyn: What should be included in the agreement?

Larisa: Well, you know, the agreement must be in writing. So, I would say that is the number one point. And typically, it needs to outline, you know, who has the right to occupy the property for life, whether any rent will be paid by one party to another, who will contribute to the maintenance of the property and household expenses like electricity, phone bills, gardening, maintenance, etcetera. If the property is sold, the granny flat interest will be transferred to a new property. What happens if one party’s health deteriorates and their care needs change. So, a contingency plan. So, the level of care that may be provided by one party to the elderly family members as part of that agreement. And what happens if the agreement is terminated and the terms of that termination. So, it’s crucial to address these issues in a formal agreement to avoid any potential conflicts or uncertainties in the future particularly because it’s expensive, so it’s expensive to litigate, and if things go wrong and you’re not documenting them properly, this is where a lot of costs can arise.

Robyn: Yeah. And there is, as you mentioned, there is a lot to take into consideration. Now Larisa, you mentioned Centrelink earlier and how they prefer these arrangements to be formally documented. Can you explain how a granny flat agreement may impact someone’s Centrelink benefit?

Larisa: Well, it can if the agreement is not done in the right way, so Centrelink benefits are mean tested, meaning they’re based on an individual’s financial situation and assets. Usually, the proposed transfer of property or funds would be deemed as a gift and would affect a person’s pension entitlements. However, under the granny flat rules you can transfer property or money, depending on if it passes the Centrelink reasonable test, to a family member for a lifetime right to reside in the home, making such a transfer exempt from the usual deeming legislation by Centrelink.

So, this is another reason why it is so important to formalise and document the agreement. So, things can get very complicated with Centrelink and there are different tests Centrelink will apply to determine whether the money you have paid or transferred to another has deprived you of an asset. For this reason, it’s important to not only get legal advice for the documenting of the agreement, but also some financial advice from someone who is experienced in this area and can also help you liaise with Centrelink to work that out.

Robyn: And what happens if the agreement goes wrong? Just like the story we talked about earlier.

Larisa: Unfortunately, not all family arrangements go to plan. As we saw with that story. Whether someone wants to sell the property due to financial pressure or relocation or tension arises, and the parties can no longer live in close quarters, it’s common for circumstances to change. That’s why it’s crucial to have upfront, honest conversations at the beginning and to put in place a well drafted agreement that includes provisions for what should happen if things do break down.

Because if people can’t agree and there’s no clear road map, they often end up in a court where you would be spending a small fortune to have someone else decide what should happen. Whereas this could have been avoided by having it properly documented in the agreement to begin with.

Robyn: Yeah. Is there anything else before we wrap up that people should be aware of if they’re considering this type of arrangement?

Larisa: Ah, yeah. So, one last important point is that granny flat arrangements can impact your estate plan, so if you transfer property or give money away during your lifetime, it’s no longer part of your estate and can’t be gifted in your will.

So, it’s essential to update your will and enduring power of attorney to reflect the new arrangement. And if, for example, you’re getting or transferring your property to one child, you may need to adjust your estate plan to ensure other children or beneficiaries are treated fairly and provided for both now and into the future.

Robyn: Yeah, there’s a lot to consider, isn’t there? And you’ve given us a lot of reasons why it is important to get professional legal advice if you are considering something like.

Larisa: Oh, one hundred per cent.

Robyn: Thanks for joining us today, Larisa.

Larisa: Thank you, Robyn.

Robyn: You’ve been listening to law talks here on 4CRB, which you can hear every Friday morning from 9 o’clock.