When entering into agreements with family or friends, it is important to consider all the circumstances that could occur, including what might happen if the relationship were to breakdown. Where agreements aren’t properly documented, many questions may arise in the event of a relationship breakdown. Clearly documenting the terms of an agreement can avoid dispute and the need for litigation.
(HINT: all arrangements can be confirmed by sending an informal email which clearly sets out the terms of an arrangement and may provide evidence at a later time, should the need arise).
Where a dispute arises, the law of equity has created a remedy known as a constructive trust. A constructive trust is an equitable remedy awarded to a party to a case where it is held that one party holds property as its nominal owner for the good of one or more beneficiaries. The trust is implied to prevent a person nominally holding a property from unjustly benefiting.
The case of Muschinski v Dodds established the principle of constructive trust. In that case the court provided relief by way of a constructive trust when a mutual agreement broke down without attributable blame in the circumstances and was not contemplated by either party.
In the more recent case of Woods v McKinlay, a dispute arose regarding the arrangement between a woman (Woods), her sister and nephew (McKinlays). Woods was involved in family law proceedings and was unable to purchase a property in which to live. The McKinlay’s then purchased a property with the intention that Woods would live in that property. Woods provided an initial amount of 130K towards the purchase and continued to make interest repayments on the loans that were taken out to enable the purchase to proceed. Those payments continued for approximately 20 years. In addition, Woods paid council and water rates during that period. There was no documentation between the parties detailing the legal nature of their relationship.
When the relationship turned sour, a dispute arose as to who was to keep the property. The McKinlay’s argued that Woods was a tenant and her payments constituted rent. Woods on the other hand claimed that she was beneficially entitled to a share of ownership of the property. Woods argued that the property was held on trust by the McKinlays and that a constructive trust existed.
The Muschinski v Dodds principle was applied in Woods v McKinlay and it was held the equity in the property was to be split equally between Woods and the McKinlays. It was held that a constructive trust exists and upon the sale of the property, the proceeds would first be applied to repayment of Woods contribution with the remainder being dived equally between Woods and the McKinlays.
Significant costs would have been incurred in the Woods v McKinlay case. Those costs could have been avoided had the arrangement between the parties been clearly documented. Entering into a commercial agreement on the basis of good faith between the parties may be risky if the relationships breaks down. It is worth emphasizing that obtaining independent legal advice and explicitly setting out the terms of the agreement before entering into it can be extremely beneficial.
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DISCLAIMER: The information contained in this article is general and is not intended to be advice on any matter. It is for information only and is not legal advice. In the event of a legal problem, you should seek legal advice.
