When granny flat deals go bad: legal pitfalls for older Aussies

An ageing population and aged care concerns may lead to more family care arrangements.

When granny flat deals go bad

Growing numbers of older Australians are opting into care arrangements with their adult children rather than moving into aged care homes – a trend that is expected to escalate as the Aged Care Royal Commission continues to spotlight serious and alarming shortfalls in the quality of institutional care.

But informal ‘asset-for-care’ arrangements within families, in which parents transfer money or property typically to an adult child in exchange for accommodation and care, are proving a legal and emotional minefield.

Older Australians are at risk of losing everything if circumstances change or relations with their relatives sour, according to research by Macquarie University Associate Law Lecturer Teresa Somes highlights,

“Such failures can occur through the breakdown of relationships, or events such as divorce, bankruptcy or the increasing care requirements of the older person which the adult child can’t fulfil,” says Ms Somes, who is urging law reform to make legal remedies easier to access for parents when asset for care arrangements fail.

The proposal has emerged from her PhD research that examined the legal position of the older person in these arrangements, including an analysis of the complexity of the law and whether it is fit for purpose.

“It’s an access to justice issue,” Ms Somes says.

The power of trust
Ms Somes says the 'asset-for-care' arrangements are made in the context of trust and confidence and are mostly informal and imprecise as to their terms despite involving the transfer of major assets.

They most common involve parents selling their property and giving the proceeds to the relative or transferring the title of their home.

As the population ages, the arrangements are gaining in popularity because they seem a perfect solution, having clear advantages for both parties, Ms Somes says.

The parent can be cared for within a family environment and family assets preserved rather than being handed over to external care providers.

The children benefit from an injection of funds to help pay a mortgage or relieve financial stress, or from enhanced value to their property by way of extensions or renovations to house their parents, aka the ‘granny flat’.

‘Sub’ agreements, for instance involving care of grandchildren can further supplement the arrangement, Ms Somes says.

However, parties generally fail to seek any legal advice prior to entering the arrangement, nor do they plan in case of its failure.

“People can enter into these agreements very quickly, if someone’s been widowed or they’ve had a fall, and they don’t want to spend the money going to a lawyer and they think they’re okay because it’s family, and they can trust them,” Ms Somes says.

“It’s a bit like a prenup agreement, and that question of, ‘why would you have one? Because that suggests you don’t trust me’.”

In the event of failure, if the adult child is unwilling or unable to repay the contributions, the parent – who is rarely included on title as a registered owner, Ms Somes’ research shows – risks being rendered homeless, or reliant on social housing or the generosity of friends.

She cites a recent case in the Supreme Court of NSW where a woman was staying with friends – “in other words, couch surfing” – after the relationship with her daughter and son-in-law soured and she was asked to leave the home in which she had contributed nearly $170,000.

Ms Somes says where the child holds legal title to the property and there is no agreement concerning the return of contributions, parents are faced with a bewildering array of law.

Generally, remedies are sought through the complex area of equitable grounds for relief, heard in the Supreme Court where a three-day hearing can cost in the vicinity of $90,000-$130,000.  

“While some cases reach the courts, we suspect many do not because at present, legal action to secure a return of contributions is hugely expensive, time consuming, very stressful and emotionally fraught,” Ms Somes says.

“An older person must either have sufficient wealth to bring an action or be eligible for legal aid or benefit from pro bono legal representation.”

Ms Somes’ research shows that in cases that do reach the Supreme Court, rulings are generally in the parent’s favour.

Tip of the iceberg
Ms Somes believes the reported cases of failed agreements represent only the tip of the iceberg, and that many families are experiencing these problems without any satisfactory resolution.

“The cases that go to court are usually because of some acrimonious breakdown, and across all Australian jurisdictions judges are commenting that we are seeing increasing numbers of cases.

“What we suspect is there are probably a lot more that fail for some other reason that doesn’t involve a relationship issue.”

Ms Somes says despite the acknowledgement from the judiciary, legal practitioners and the government that the issue is on the rise, there is little evidence of its actual extent.

In a bid to gain further insight, Ms Somes and her Macquarie University Law School colleague Professor Therese McDermott are conducting further research to gather empirical data on failed agreements. The research will involve a survey of community legal centres, Legal Aid offices and law firms known to practice in the area.

“What we want to know is, how often are they seeing people with this particular problem? And things like, why did these people enter into the arrangement in the first place; why hasn’t it worked; what are they doing now and what do they want … do they want to pursue something? Would they pursue an action if it was cheaper, quicker and easier to do? Is it more important to keep the family unit together or do they just want their money back?”

The way ahead
Ms Somes says while legally binding contracts to cover family agreements are a means to prevent bad outcomes for parents, the reality is that few families at present enter into them.

Turning to remedies, Ms Somes in her PhD proposes a simpler and more cost-effective way for disputes to be resolved.

She argues for the introduction of a statutory cause of action so that cases don’t require an action being commenced on equitable grounds, along with these matters being heard by tribunals rather than the courts.

“This aims to enhance access to justice and allow a less adversarial pathway for people to take, so that family disputes have a better chance of resolution,” Ms Somes says.

“More older people therefore will have a greater chance of having money or property returned to them.”

Do you currently have a granny flat arrangement? What legal protection do you have for your situation?

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    COMMENTS

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    patti
    11th Mar 2020
    10:17am
    Difficult to arrange with one son, when I have two of them. How would I make sure that the proportion of monetary contribution is equal for both? that is one of the reasons why I would probably not move in with either. I'd rather live close by, but independently as long as I am able. And if the money is tied up in their assets, how would I pay for aged care? it's a time bomb waiting to go off
    KSS
    11th Mar 2020
    12:32pm
    All of which are reasons to have a formal legally binding agreement surely.
    Robene
    11th Mar 2020
    10:28am
    I sold my apartment due to increased strata and special levies. My daughter was renting and paying nearly $500 per week. She suggested that we see if we could obtain a mortgage to buy a home with a granny flat or with enough room for one to be built. We found a property which had everything we wanted and more. However, I was concerned about the property being beside a notorious social housing community but was convinced by real estate agents that there wouldn't be a problem. Within weeks of moving in, the trouble began which was made worse by my grandchildren befriending children who lived in the social housing estate. It's not been 2 years and it has been nothing but drama. Whilst our arrangement hasn't completely failed as yet, it is very close to it. With the drop in house values, I fear that I won't be able to recoup the money which I put in including being more than $50K more in debt than when I sold my apartment. Now with one grandchild deciding to move to their dad's house to live, my daughter will lose her FBT which pays half of her share of the mortgage. So it appears that we will have to sell the property anyway. I wish that i had researched it more and taken my gut instinct to not buy here. A very hard lesson learnt including a continuing breakdown in my family's relationship including my other child and partner.
    older&wiser
    11th Mar 2020
    2:33pm
    Agree - I too have seen this with a single friend of mine who did a similar arrangement with her divorced single daughter.
    They had always got on well - that was until daughter got involved with a total dipstick user. Moved in, only worked sporadically, they got married, he stayed just on 12 months then walked out, then the fight was on to sell the place for 'his half' (as he demanded). The legal fight that ensured was horrific and my friend was financially destroyed. She went from owning a beautiful 4 BR home outright, to renting a small unit in an area she hates.
    I would never do it.
    hyperbole
    11th Mar 2020
    10:29am
    I would never enter into a granny flat arrangment with family. Divorce does happen you know and then you will find out what anxiety is.
    Sen.Cit.90
    11th Mar 2020
    11:30am
    Yes, hyperbole, I know of one lady who had built a Granny flat on her married daughters land. The daughter divorced and the sale of the property of the couple had to include the Granny flat basically, leaving the mother without a home and quite a loss of money.
    Old Fella
    11th Mar 2020
    11:11am
    An interesting overview of such family situations that should have had more formal arrangement in place. One other situation not mentioned and no doubt more common is the circumstance where family, including siblings but primarily Parents; provide informal cash loans to their children to bridge the gap of home deposits or excessive bank loans. Initial expectations are the loan will be repaid before the lenders demise or in an emergency. However somewhere along the time frame goes awry and the informal loan becomes an unrecoverable gift. Seems particularly evident when your offspring divorce and their ex partners see and know only asset accumulation standards over family support and assistance previously provided.
    Old Fella
    11th Mar 2020
    11:11am
    An interesting overview of such family situations that should have had more formal arrangement in place. One other situation not mentioned and no doubt more common is the circumstance where family, including siblings but primarily Parents; provide informal cash loans to their children to bridge the gap of home deposits or excessive bank loans. Initial expectations are the loan will be repaid before the lenders demise or in an emergency. However somewhere along the time frame goes awry and the informal loan becomes an unrecoverable gift. Seems particularly evident when your offspring divorce and their ex partners see and know only asset accumulation standards over family support and assistance previously provided.
    Donna
    13th Mar 2020
    12:24pm
    Working well for me, we purchased home with existing Granny Flat, I paid substantial deposit, daughter and son in law make mortgage payments, my view is I have paid my rent for rest of my life, my name is on property title, my share of property is “willed” to my daughter, anything else I have to my two sons, they are all aware of why I have done that (my daughter has my only grandchildren), my sons not likely to have children. POA states 2 out of 3 of my children need to agree on any decisions made on my behalf,


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