Even if it's pretty clear that money was advanced as a loan not a gift, problems can arise in enforcing if as lender you have not insisted on full compliance
Unfortunately disagreements with family and friends are commonplace. A fallout may well have a lasting effect on the personal relationship but badly drafted documents may restrict the options available to the lender if repayment of the loan is not made when due.
Informal loans – hidden risks
Even if only lending as a favour and or informally with no written agreement you can get trapped. Before entering into a loan or private funding agreement with a family member or friend you need to consider if, as the lender, your loan agreement complies with the standards required under the Consumer Credit Act 1974 (CCA). There are traps.
Was it a loan or a gift?
One of the most common defences to a dispute about a loan to friends or family is that the money was a gift and not a loan. An easy mistake to make when lending money is to assume that if you have the loan documented as a loan in writing, with a detailed loan agreement or not, this is conclusive.
Whilst a written agreement or contract would be compelling evidence, the UK courts can and will look at all the circumstances, the borrower might claim a verbal agreement that the money was a gift in reality. There could be emails or text messages or other evidence which could muddy the waters about the exact terms agreed.
Even if it’s pretty clear that money was advanced as a loan not a gift, problems can arise in enforcing if as lender you have not insisted on full compliance. In legal terms the borrower may argue that the contract terms have been varied or that you’ve waived any breach of the agreement.
So, for example, if you have not enforced agreed regular repayments or have demanded repayment (if that is your right under your contract) many times in the past but then didn’t take action, you may face problems enforcing.
What’s the loan for?
It’s natural to be predisposed to helping family or close friends, especially if the approach is made on the basis the borrowing is due to financial problems. However, it’s important to understand what the loan is for and to consider whether you can protect yourself. For example, if the loan is to support a business in difficulty, can you protect yourself with some form of security? Insisting on regular repayments to reduce the loan over time may often be preferable to a fixed term loan or simply repayment on demand. Ensuring that you are able to get information about what’s happened to your money and the underlying use of it are also recommended.
Security – charging a property
Where the agreement is secured by a charge on land, it will usually fall within the Mortgage Conduct of Business Regulations. These have separate requirements and usually supersede the compliance standards of the CCA.
Is suing the right response to loan default?
Emotions run high when you have helped a family member or friend financially and they then default. It’s very tempting to want to teach those people a lesson and get tough. However, as with any form of dispute, getting a civil court judgment does not mean you will get your money. In other words, successfully enforcing a debt does not automatically follow even if you have a judgment.
Due to the emotion involved disputes relating to family or friends loans often benefit from some involvement of professional advice not just to establish your legal rights and position but to ensure you get measured, experienced advice and with the aim of not making the dispute even more personal than it is already by providing a buffer between the parties.
If you need advice on a dispute over a personal or business loan to friends or family please do get in contact.
After studying at Cambridge University, Alex spent 5 years with an international law firm before joining Gannons. He specialises in high-value and complex commercial disputes and employment law.