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Read more“It was a gift.”
“No it was a loan.”
A couple are divorcing. One person says that their family has lent them money which must be paid back before assets are divided in the divorce. The other person claims that the money was given as a gift and doesn’t need to be repaid at all. This is most commonly (but not exclusively) seen when money is provided for the purchase of a house.
Here, divorce law specialist Amy Harris explores how the family law court will decide whether money that was given by a family member is a gift or a loan and whether it needs to be repaid.
Was it a gift or a loan?
Where there is an argument in divorce proceedings about whether money given by a family member should be repaid, the court must first decide whether the money is a gift or a loan. To treat the money as a gift, it has to be established to the court’s satisfaction that there was the intention to give the money away.
What is the difference between a ‘hard’ loan and a ‘soft’ loan?
If the court decides that the money was not a gift and was intended to be a loan, it can then be characterised in two different ways:
- A ‘hard’ loan.
- A ‘soft’ loan.
A hard loan is treated by the court as being similar to a commercial loan and it will work on an assumption that a valid debt has been created with the characteristics of a commercial arrangement which must be repaid. If the court decides that a debt is a soft loan it’s more likely to take the view that it won’t need to be repaid. In those circumstances, the court is more likely to ignore the arrangement.
In some cases, it may not be immediately obvious what type of loan it is. Guidance on this issue was provided in the case of P v Q in which the Judge produced a list of factors that may indicate how a loan should be categorised.
Hard loan factors
For there to be a persuasive case for determining a loan to be a hard loan, the court has suggested that the following factors may be relevant:
- The borrower’s obligation was to a finance company.
- The terms of the obligation had the look and feel of a normal commercial arrangement — e.g. the loan attract a commercial rate of interest, it was accompanied by a robust set of undertakings and events of default (unless repayable on demand) and perhaps there were some fees payable.
- There was a written agreement, as opposed to a loose verbal arrangement.
- There was a written demand for payment, a threat of litigation, actual litigation or the third party who provided the loan had intervened in the court proceedings (i.e. applied to be made a party in the proceedings).
- There had been no delay in enforcing the borrower’s obligation to repay or any other material obligations under the loan.
- The amount of money that was lent was for such an amount that it would be less likely that a creditor would be likely to waive the obligation, in part or full (e.g. the loan was for a large sum of money).
Soft loan factors
In order for there to be a good case for a loan to be categorised as a soft loan, the factors highlighted were:
- The borrower’s obligation was to a friend or family member who remained on close terms with the borrower, which would mean the lender would be unlikely to want the borrower to suffer hardship.
- It was an informal arrangement and the terms did not have the look and feel of a normal commercial arrangement (e.g. interest free, minimal undertakings and obligations on the borrower, etc).
- There had been no written demand for payment despite the due date for repayment of the loan having passed.
- There has been a delay by the lender in enforcing the borrower’s obligations.
- The amount loaned was for such a sum that it would be more likely that the lender would be prepared to waive the obligation to repay, either in whole or part.
In any given case, a single factor or a combination of factors could lead to a finding that a loan is a hard loan or a soft loan. It’s fair to say that each case must therefore be considered on its own merits. There may be factors pointing in each direction in which case the court will have to make a determination based on what evidence it has before it and what a judge considers to be fair and reasonable in the circumstances and context of the case.
The importance of documenting agreements
What is clear is that in any argument over a ‘soft’ or ‘hard’ loan it will certainly help to have drawn up a formal written agreement, ensuring that the loan is subject to relevant commercial terms. Our family law team specialise in helping families to protect their wealth by assisting with the preparation of loan agreements and pre- and post- nuptial agreements.
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If you need assistance or advice in relation to any of the matters raised here, please contact our family law team or our banking and finance team.
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