An informal agreement between a parent and their children is a “granny flat agreement”. Parent provides funds to create a granny flat, either by buying a property or by modifying an existing home. What the parents get in return is the lifetime right to use the flat or until they need special care.

In most of the cases, these arrangements work great. The parent gets to live near the family and enjoy their love and support.

Unfortunately, sometimes these arrangements don’t work out well. When that happens, it can threaten not only the wealth but also the dignity of the parent. The problem is that parent usually doesn’t have anywhere to go in case the relationship with the child or child’s spouse breaks.

What the law has to say about granny flats?

The only way a parent can recover their contribution is to go to court. However, there is a complex set of rules when a case like this is in question.

First, the parent must prove that the funds they provided were not a gift, but instead part of an agreement about the family living together. Usually, these agreements are not in writing, which to court is like they didn’t even exist.

A way to settle a dispute is to apply equitable principles. The idea is simple – a parent who provided the funds to improve the property, should get the funds back or get the share of the property in case the agreement ends. The court will not allow children to have all the benefits of provided funds, without the parent having access to the granny flat.

If the court concludes that the child promised the parent interest in the house, the child will have to pay the contribution back. This often leads to the child selling the property, because they don’t have money to return the parents’ investment.

Furthermore, the problem for parents is that taking a disagreement like this to court costs money.  The government provides Legal Aid in some cases, but most parents don’t qualify for that. In the court, the parent has to present evidence that the promise or arrangement existed. Usually, they have to recollect past conversations to prove they provided the funds.

Most of the granny flat agreements aren’t in writing. The parents and children rarely consult a lawyer about the matter. There were even situations when parents had to say that their contribution was a gift, to help the child secure finance from third party.

Every aspect of these agreements makes court cases expensive and difficult for both parties.

Some Australian states have laws that can help resolve these cases easier. The Property (Relationships) Act 1984 in New South Wales is a good example. Although, the act covers granny agreements, the parents still have to prove in court that they provided the funds.

South Australia, Victoria, Tasmania and ACT all have laws that are similar to the one in NSW, but it only covers couples. They might apply to families in some court cases. The NSW law is more complete, which is just good for parents in that state.

Even though both parties want to resolve the dispute as fast as possible, the court cases can take up to a year to get to the hearing. Even then it takes time to review financial documents and hear out both sides. During the trial, the parent will have to find emergency housing, usually paid by the government.

In case that the child’s marriage ends, the whole situation gets even more complicated. If the child and their spouse take to the Family Court to resolve property share, the parent’s part will also be part of the dispute. In the past, cases like this lasted longer than going to the Supreme Court.

How to speed up the process?

The most recent idea is to enable both parties access to new, more practical rules that will help separate property interests and also offer early mediation. The new rules would take into account how long both parties lived together, did the value of the property increase and did they received some benefits. These rules should provide guidelines that the court could follow.

Another idea is to give civil and administrative tribunals jurisdiction to resolve these cases. These courts would be more efficient than Family Court or the Supreme Court.

The experts recommend that both parties should ask for legal advice before agreeing on a deal. However, parents trust their children and want to live near them. If the parent or the child get the advice they need, it would be possible to avoid disputes in the future.

When it comes to granny flat arrangements, Centrelink automatically treats parents’ funds not as a gift, but as an investment. This could lead to the parent having their pension reduced in some cases. It is enough for the government to believe that the parent still has the money they actually gave to the child.

On the other hand, the children might be in trouble if the Tax Office finds that they made a capital gain since the funds provided by the parent increased the value of the home.

The Australian Law Reform Commission has already looked into the matter, but the rules still need to be updated. Parents shouldn’t fight in the court to get the funds they invested, thinking that they have secured a home for the future.