Can be advantageous, but there are fishhooks
For many people, the thought of selling their home subject to an agreement that they will be able to live in it for the rest of their lives can seem like the best of both worlds. It may be an attractive option for those looking to keep the property within the family, unlock some of the value tied up in their home or pass responsibility for maintenance and upkeep to someone else without having to move.
At a time where housing costs continue to rise, arrangements like these are gaining popularity – particularly between family members.
In such arrangements, parents may sell their property to their child(ren) on the basis that they can remain in the property for however long they wish. However, while a lease for life arrangement may appear straightforward, it can give rise to a range of legal and practical issues.
Before entering into such an arrangement, it is important to carefully consider the potential risks and ensure the arrangement is properly documented and understood by everyone involved.
What is a lease for life?
Lease for life arrangements can go by a number of different names such as a licence to occupy or life tenancy but, regardless of the name, the purpose is generally the same: to give someone the right to live in their property for as long as they wish without the shackles of actually owning it.
There should most definitely be a legal agreement about the arrangement. It will usually set out the circumstances in which that right comes to an end – most commonly if the ‘former’ owners are no longer permanently living at the property, if they need to move into residential care or on the occupant’s death.
In some cases, the parties may agree that the lease will be registered against the property’s title. Registration provides the occupant with greater protection. This, however, may not be acceptable to all lenders and will involve additional legal costs to prepare and register the documentation.
So, is it a good idea?
Under the right circumstances and if the parties get independent legal advice before entering into such arrangements, a lease for life can be a good idea. It can, however, create a number of risks for both parties if a dispute arises, including relationship breakdowns.
For the future property owner: It is important to be aware that New Zealand tenancy laws may apply to this arrangement under the Residential Tenancies Act 1986; these cannot be simply contracted out of – even if all parties agree to the arrangement.
Additionally, there is the need to consider what costs and maintenance would be shared and in which proportions (if any).
For the seller/future occupant: Occupants must consider what protections they have if the ‘new’ owner fails to meet their obligations under the agreement. This is particularly important where the lease has not been registered against the property’s title as enforcing the occupant’s rights may become more difficult if a dispute arises.
There are also considerations to be made in terms of:
- Rest home care and how this is to be funded in future, if it is required
- Whether the buyer can borrow money secured against the property
- The implications for other children in the family. This can become a major problem, particularly if the property increases significantly in value but this was the parents’ primary asset which then can result in depriving children of their inheritance and enriching others
- What happens if the ‘new’ owner’s circumstances change such as with a relationship breakdown, serious illness, bankruptcy or they die? The property may need to be sold or someone else in the family may end up owning an interest in the property, and
- Tax: particularly when taking into consideration the sale price of the property.
A long-term view should be taken
These arrangements involve both family relationships and significant family assets, so it is important for both parties to think beyond the immediate benefits and consider how changing circumstances may affect the arrangement over time.
While everyone may begin with the best of intentions, life is unpredictable. Taking the time to clearly document the arrangement and ensure that all parties understand their rights and obligations from the outset can help minimise future uncertainty and support positive family relationships for years to come.
If you’re contemplating such an arrangement, please contact us. It’s vital to have independent legal advice.
