It may seem like overkill, and illogical to boot, to insist on a family loan being recorded in a formal contract. But in fact it’s the only logical course of action to take, as we shall find out in the context of a court fight between a daughter and her parents over a R540k “loan”.
It isn’t clear from the stated facts whether this particular family fall-out stemmed from a simple misunderstanding or from something worse, but the outcome shows just how easily things can go wrong if family loans aren’t properly agreed and recorded.
We’ll end off with a look at why that risk applies to even the most rock-solid of families, listing five possible scenarios in which the lack of a formal contract could well lead to tears.
“Family helps family in times of need” - that’s been part of human culture since long before the dawn of history but be sure to observe all legal formalities. A recent High Court decision provides an excellent example of the risks of not doing so.
Parents lose R540,000
5 reasons why you need a contract, no matter how strong your family
One wonders how many families have rued their attitude of “We have a very close and strong family, and we trust each other with everything. No way do we need a contract. Forget it.”
But it’s not just a matter of trust. Consider these scenarios -
Bottom line: Have a clear, written contract recording at the very least the amount of the loan and the agreed date and terms of repayment. For significant amounts of money, professional advice is essential.
A final thought – ask about the National Credit Act
It may seem strange in the context of a family, but your loan agreement will be unenforceable if you didn’t register as a “credit provider” in terms of the National Credit Act (NCA) in circumstances where you should have registered. In many cases it won’t be necessary, in that it doesn’t apply where family members are dependent on each other. Plus, only “arm’s length” transactions will as a general rule fall under the NCA. But there are grey areas here, so specific advice is again essential.
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Disclaimer: The information provided herein should not be used or relied on as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your professional adviser for specific and detailed advice.
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