For various reasons, family members and friends regularly enter into agreements about money and land, from paying for a holiday up front on behalf of a family member or friend to promising to gift land or property to a family member. Many agreements made every day between family and friends are complied with without a hitch, but when should you obtain legal advice before entering into an agreement and what should you do to protect yourselves? The best example of when to take legal advice is when lending money.
Lending money
Money is lent in all sorts of scenarios every day, from a friend paying for dinner before money has been transferred back to their account to very large loans between family members. The trick is to know when to obtain legal advice. Many people assume that because they are lending to a family member, friend or partner, there is no need for a formal agreement or legal advice but there are various pitfalls you could fall into without obtaining legal advice.
When entering into agreements with family, many have the best intentions and for that reason rely on verbal agreements without obtaining advice from a solicitor. However, this could lead to difficulty getting your money back due to for example, economic changes. When borrowing, the borrower may have been completely convinced they would be able to for example, re-mortgage a property to repay the loan after a period of time or to have saved the money to pay the loan back, but where the loan is large, even the smallest economic changes could leave their ability to do this very limited.
How to ensure the money is protected?
Given the potential pitfalls, it is therefore important when considering lending amounts in the thousands, to ensure a loan agreement is in place. This can be really simple and state that money will be repaid on a specific date to a more complex agreement which deals with potential “what if” scenarios. Independent advice from two separate solicitors should always be obtained by both parties on these agreements to protect their position.
An alternative way to protect your sums would be to place a charge on any property owned by the debtor to protect the sum in question. Again, this is something which you should take legal advice on to ensure all relevant steps have been taken to do this correctly, such as updating any mortgage company.
What are the dangers of not obtaining advice?
Although no one wishes to think of their family members or friends as acting in a way such as this, the biggest issue that arises out of family agreements lending money is that when the loan term ends and no repayment is forthcoming, the most common argument from the borrower is that no written agreement is in place and that the money lent was in fact a gift. Whilst the assumption in common law is that the money was loaned in absence of any other evidence (unless it is loaned between a parent and child), in reality, the Court process to prove this can be long and expensive, and where all the evidence is verbal, there is huge risk to the lender that the Court could find against them.
Even if you are successful at Court, you can have spent thousands of pounds of legal fees on representation, which will not be fully recoverable. In addition, it may be that the other side does not have the funds to repay you. In contrast, whilst you would have to pay some money out for a loan agreement to be drafted by a solicitor, it would be substantially less than the fees payable in a costly litigation.
The other danger of not obtaining advice from a solicitor, or mortgage adviser or other professional, can lead you to agree to something without understanding all the necessary steps. For example, if the loan is for something specific, and the borrower already owns a house with a mortgage, there could be conditions requiring the mortgagee to be made aware.
In light of the potential dangers of entering into an agreement to lend money without getting legal advice, it is always best to contact a solicitor to find out more. If you would like further advice on money already loaned, money you are trying to get repaid or wish for a loan agreement to be drafted, contact our Litigation and Commercial Team on 0116 255 1811 for an initial quote.
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