A recipe for disaster – part 1

In 2004, Michael Lee and his wife King-Su Huang had what they thought was a really good idea. They wanted to buy a house in Kensington for £1.57 million, but did not want the extent of their wealth of to be made public or to risk the property being called on as collateral for business loans. They therefore bought the property in the sole of their nephew Cheng-Jen Ku and let him live there.

However, they all then fell out and Mr Ku claimed that he was the true owner of the house and that his aunt and uncle had “gifted” it to him in accordance with Taiwanese tradition. They all ended up in court, where the judge found in favour of Mr Lee and Ms Huang, finding that Ms Huang was the sole beneficial owner of the property. Mr Ku was ordered to pay his aunt and uncle’s costs, reported as being £150,000.

Mr Lee and Ms Huang spent £1.57 million on a house in 2004, but if they had sorted out a formal arrangement with Mr Ku at the time, court proceedings could easily have been avoided. Mr Ku has indeed been ordered to pay their legal fees, but the amount to be assessed by the court may not cover all of their fees and, if Mr Ku proves unable or unwilling to pay them, then his aunt and uncle will have to incur more expense to enforce the costs order, perhaps without much chance of success. I don’t know what Mr Ku’s financial circumstances are, but if he has not got £150,000, the costs order may prove to be a pyrrhic victory.

Informal property owning arrangements are a recipe for disaster. The potential for an argument about who owns what and how much is huge. If only they had ensured that when they instructed a conveyancers to handle the work necessary to purchase the house, they had also instructed them that there should also be an express declaration of trust, executed by all three of them, formally stating that although the house was registered at HM Land Registry in the sole name of the nephew, he was in fact holding the house on trust for his aunt who was the sole beneficial owner. In other words, that, despite him occupying the property, he nevertheless had no interest in it and she was entitled to all of the equity. The house cost £1.57 million. A declaration of trust would probably only have cost a few hundred pounds at most.

In the absence of any documentary evidence, the court was forced to infer what everyone’s intentions were from their conduct. The judge noted that the couple had paid all the bills connected to the property and the costs of two significant renovations. Mr Ku, on the other hand, had made “little or no contribution”. The aunt and uncle eventually triumphed, but no doubt that this was after a great deal of expense, stress and family acrimony.

Informal property owning arrangements crop up quite often in divorce/dissolution financial cases and unmarried couple separations. I am often instructed by clients who tell me that their parents or parents in law have provided part of the purchase price of the family home. Sometimes they tell me that this money has to be repaid or that they should keep more of the equity because it was provided by their parents, not their ex’s. Sometimes I am told that the parent is a joint owner in the property, only discover that this is not accepted by the ex who claims that the purchase monies were “gifted” to them.

(A small niggle at this stage. I loathe the use of the “gift” as a verb. People say “gifted” to make it sound more formal. If it was anything else, say a book, a washing machine, a car etc, it would not have been “gifted” to them. It would have been given to them. It does not magically gain a greater legal status just because it is of a significant value. They gave it to them , not “gifted” it. To be gifted means that somebody has great special talent or ability or is of exceptionally high intelligence. It’s just pretentious, like saying “utilise” instead of “use”).

Whenever I am told about one of these arrangements, I have to ask some probing questions. Was it a gift or a loan? Was it made to both of them or to just one of them? Is there any documentary evidence to how where the money came from? Can we get hold of the conveyancer’s file to see if there is any documentary evidence of this in the file? Or was the house bought so long ago that the conveyancer’s file has been destroyed. (Solicitors don’t keep their files forever. Quite aside from the GDPR requirement not to hold client data for longer than is necessary, we would all need vast storage facilities to hold all of our client’s old files).

Quite often, there is no evidence, apart from perhaps some bank statements showing a payment, but that won’t prove that it was a loan or a gift.

Loans from family members can often be problematic. Debts can make straightforward cases much harder to resolve. It is not unknown for the court to treat loans from family members as “soft” loans, unlike, unlike a loan from a bank which is a “hard loan”. In other words, the court may assume that parents may be generous about when , if ever, a loan to their son or daughter might be repaid. In cases where there is not much to divide and to then meet the parties’ and their children’s needs, ignoring the soft loan can help the judge to find a workable solution.

If, however, the parents have a charge registered against the property securing the loan, then I think it would be much harder for the court to take this easy way out. At the very least, there should be a written loan agreement. Even better, if it is alleged that the parents have an actual beneficial interest in the property because of the monies they provided (I’m not entirely sure I approve of “monies” to means “money” either…), then preferably they should be registered as co-owners. At the very least (e.g. if the property is mortgaged, but the parents aren’t parties to the mortgage) there should be a restriction registered at HM Land Registry relating to a declaration of trust. All of this makes the true position so much clearer.

The aim of all this formality is to avoid having to go to court to argue about it. If the position is unclear, there may have to be a preliminary issue hearing where the court decides who actually owns the house, before it decides at a later hearing how to divide the assets (something that is very complicated where the property is jointly owned with a third party), all of which just adds hugely to the bill. The losing party is also at risk of being ordered to pay costs, unlike the normal rule that both sides are usually responsible for their own legal fees.

Not doing things formally at the outset can lead to chaos and vast expense later. Avoiding the minimal expense involved in getting lawyers to formalise the arrangement is a massive false economy.

“For want of a nail, the shoe was lost. For want of a shoe, the horse was lost. For want of a horse, the rider was lost. For want of a rider, the battle was lost. For want of a battle, the kingdom was lost, And all for the want of a horseshoe nail.” (Traditional proverb)

COMING SOON: A recipe for disaster – Part 2

18 November 2023

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