Perils of loans to family

Posted on May 29, 2017 in Private Client (Tags: Family loans, Property Law) Private Client.jpg

The sad case of Warin v Warin which was decided in the High Court in Wellington on 26 April 2017 is a salutary lesson for anybody considering lending money to a family member or friend.

The case involved an elderly couple (Mr and Mrs Warin) who sued their daughter Colleen Warin and were awarded summary judgement against her for unpaid loans totalling $367,903.90 (plus interest).

Mr and Mrs Warin first lent money to Colleen in 1996 when they transferred a property in Te Puke to her in return for an acknowledgement of debt back to them of $100,000 and a promise given to them orally by Colleen that she would build them a “home for life” on the property.  The $100,000 loan was originally secured by a mortgage over the Te Puke property in favour of Mr and Mrs Warin.

Colleen did arrange for a home for her parents to be built on the Te Puke property, but she then subsequently subdivided the property into two sections and sold both sections in 2011 and 2012 including the section with Mr and Mrs Warin’s “home for life” on it.  For reasons that are unclear, Mr and Mrs Warin agreed to the sale of the sections and they allowed their mortgage to be discharged without being repaid the $100,000.  As a consequence of this they had to move out of their “home for life” and move into another property that they owned, but which had previously been rented and provided a source of income to them.  They were in their eighties when this happened.

The sale of the Te Puke properties resulted in a GST liability for Colleen of $141,749.70 which she could not pay.  She asked her parents to lend her this money and told them that she would repay it when she received a GST refund.  (It later transpired that Colleen was aware at the time of this transaction that there would be no GST refund due to her.)  Between 2010 and 2014 Mr and Mrs Warin lent Colleen a further $126,154.23 in 23 separate advances.

None of the above transactions were ever recorded in writing. 

Mr and Mrs Warin gave evidence in court that they trusted their daughter.  She is a qualified chartered accountant, she had completed their tax returns for years and had given them financial advice.

Mr and Mrs Warin first asked Colleen to start making repayments on the money that she owed to them in May 2012, but these requests were ignored.  Eventually they consulted their solicitors and in August 2015 their solicitors sent a letter of demand to Colleen.  Colleen also ignored this.  Eventually, Mr and Mrs Warin were forced to apply to the court for summary judgement against Colleen.

In the High Court, Colleen did not deny that she had received the monies from her parents.  Nor did she deny that they were loans (as opposed to gifts).  She argued however, that the loans were not made by her parents personally but by their family trust, that the loans were not “repayable on demand” and that even if they were repayable on demand, no valid demands had been made for repayment.  She believed that her parents had told her she only needed to repay the loans when “her situation” allowed her to.  She claimed that she had been through personal difficulties (including a divorce) and that she had no ability to repay the loans.

The legal test in a summary judgment application is that the judge must be satisfied that there is sufficient evidence to show that the defendant has no reasonably arguable defence. 

In this case, there were no written loan agreements setting out the terms of the loans and when or how they were repayable.  There was also no evidence that Mr and Mrs Warin had told Colleen she only needed to repay the loans when she was able to.  Mr and Mrs Warin produced evidence (in the form of letters from them and their solicitors) showing that demand had validly been made for repayment.  Colleen was not able to produce evidence refuting this. 

Justice Smith in the High Court entered summary judgement in favour of Mr and Mrs Warin and awarded interest on the judgement sum at the rate of 5% per annum calculated from 7 September 2015 down to the date of the judgement.  He also awarded costs in favour of Mr and Mrs Warin.

Loans between family members are very common, and with rising house prices, it is likely that many first home buyers will need to rely on loans from parents or other family members to help them onto the property ladder.  When entering into legal transactions with family members it is tempting to rely on trust and goodwill, but sadly as this case shows, even family transactions (or perhaps especially family transactions) should have the terms clearly recorded in writing so as to protect both parties and avoid messy family disputes being aired in the very public forum of the courts and media. 

Stephanie Pettigrew