Parents and children rarely put agreements about granny flats in writing and almost never consult a lawyer – but when these arrangements go wrong, the consequences can be disastrous and costly for all, writes …
A “granny flat agreement” is an informal arrangement between a parent and their adult child or children.
The parent (often elderly) contributes funds to create granny flat accommodation either by modifying a home or by buying a suitable property in the name of the children.
In return they agree to provide the parent with a lifetime right to live in the granny flat, or at least until the parent needs residential care.
Many of these arrangements work out well.
The older person then enjoys the love and support of having their family close by as they age.
When an arrangement of this kind goes wrong, however, it can seriously threaten the wealth, autonomy and dignity of the elderly parent.
If the relationship between the parent and child, or child’s spouse, breaks down and the parent is asked to leave the property, he or she may be left with nothing.
How does the law treat granny flats?
The parent’s only chance of recovering her contribution is to go to court. These court cases depend on applying a complex set of rules.
The parent must prove the contribution was not a gift but that they supplied funds as part of an arrangement that the parties would live together.
Agreements creating interests in land need to be in writing, and usually there is no written agreement.
The court can apply equitable principles.
A parent who contributed to improving the property ought to have the contributions back, or a proportionate share of the property returned if the arrangement ends prematurely, because it is unjust for children to retain the benefit of the contribution without providing the granny flat.
Where the court finds that the parent relied on a promise by the child that the parent would have an interest in the house, or at least a right to live with the child for life, the child can be required to repay the contribution.
This often means the child must sell their house if they cannot refinance to obtain the money to pay the parent.
If the parent is entitled to a share of the property, the house has to be sold to realise the parent’s share.
The problem for parents is that court cases cost money, unless Legal Aid is available, but only parents who are truly destitute qualify for assistance.
The parent has to produce evidence of the arrangement or the promise. They often have to recount conversations from many years ago to prove there was an arrangement.
The children have to spend money on their own lawyers.
Parents and children very rarely put these agreements in writing and almost never consult a lawyer. Sometimes, to help the child get finance, a parent may have told the lender the contribution was a gift.
All this makes court cases complex, difficult and expensive.
In New South Wales, the Property (Relationships) Act 1984 may apply to granny flat disputes, but the parent still has to show how they contributed to the child’s property.
However, the NSW legislation is broader, which makes things worse for parents outside NSW.
When a dispute arises, the parties usually want to resolve the matter as quickly and as cheaply as possible.
But court cases can take a year or more to get to hearing. Affidavits must be prepared and financial documents reviewed.
During this time the parent may be living in emergency housing, often at public expense.
The picture gets worse if the child’s marriage breaks down.
The parent’s claim then gets taken into family property proceedings between the child and their spouse in the Family Court or Federal Circuit Court. This can take even longer than going to the Supreme Court.
A better way to resolve disputes
Parties to these disputes need fast access to a system of practical rules for separating the parties’ property interests, and one that offers early mediation.
These rules would cover factors such as increases in the value of the property, how long the parties lived together, what benefits they received, and other discretionary considerations. Such rules might provide the basis for a set of statutory guidelines for a tribunal to apply.
Civil and administrative tribunals emphasise informality and conciliation, so giving these tribunals jurisdiction to resolve granny flat disputes according to statutory guidelines would arguably be more efficient than going to the Supreme Court or Family Court.
Parties really should seek legal advice on granny flat arrangements before they commit to the deal.
But parents often trust their children and are optimistic that they can live together as a family.
If a lawyer provides advice to an elderly parent individually and with an awareness of their client’s possible incapacity or vulnerability to undue influence, that gives all parties a chance to decide what they want to happen if the relationship breaks down.
Gifting attracts an asset test under which the parent might be deemed still to have the funds contributed, which could reduce their pension.
The children can also be worse off if the Tax Office considers that the child accepting the contribution made a capital gain because the parents’ contribution increased the value of the home.
Although the Australian Law Reform Commission has looked at some aspects of this issue, action is need to reduce the complexity of existing equitable and statutory rules.
Elderly parents should not have to take their children to court in expensive legal proceedings to retrieve the contribution that was meant to ensure they had a secure home in their later years.
Patricia Lane, Senior Lecturer, University of Sydney
Subscribe & don’t miss a single episode of Michael Yardney’s podcast
Hear Michael & a select panel of guest experts discuss property investment, success & money related topics. Subscribe now, whether you're on an Apple or Android handset.
Need help listening to Michael Yardney’s podcast from your phone or tablet?
We have created easy to follow instructions for you whether you're on iPhone / iPad or an Android device.
Prefer to subscribe via email?
Join Michael Yardney's inner circle of daily subscribers and get into the head of Australia's best property investment advisor and a wide team of leading property researchers and commentators.