Case example: Peters v Peters [2013] NZHC 1061

In Peters v Peters [2013] NZHC 1061, a gift/loan dispute arose with respect to what was ultimately accepted to be a loan advance. Mr and Mrs Peters purchased a property, which was registered in the names of Mr Peters and his parents as the trustees of a family trust. However, $800,000 of the purchase price was funded by an advance from Mrs Peters’ parents. The Peters later separated.

The trustees, who had unsuccessfully tried to argue that the $800,000 advance from Mrs Peters’ parents was a gift, and that they were left out of pocket as to the amount of the loan and the significant legal fees incurred, filed proceedings recovering their costs as well as damages on account of emotional distress caused by the lawyers acting for them on the purchase. The High Court concluded that in failing to determine (and document) the nature of the advance, the lawyers were guilty of negligence. Matters not adequately addressed by the lawyers acting on the purchase included:

• • failing to identify the source of the deposit
  • failing to adequately identify how the borrowings were being used and by whom, the loan advance and borrowings amounting to more than the purchase price on the settlement statement
  • failing to advise the purchasing trustees that, in the absence of any documented and agreed limitation of liability, the trustees remained personally liable, and
  • failing to advise the clients of the need to get independent advice because of the acting solicitor’s clear conflict (in representing both the lender and the borrower).

Documenting loan advances or gifts is not only professionally and practically appropriate, it is also an opportunity to canvas expectations and to confirm each party’s understanding of the transaction. Such enquiries can also reveal conflict exposure, clearly identify who the client is, and identify other risks that might flow from the transaction.

Family loans, the fishhooks involved, and how best to avoid them, are discussed in A Practical Guide to Legal Issues for Older People, which also includes a checklist for documenting family loans and a sample Acknowledgement of Debt.

View an example of a Family Loan/Gift Checklist here.