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In these unprecedented times, there is a renewed emphasis on family. People once again realize the importance of caring for their loved ones, especially older relatives. For many adult children, a granny flat agreement may now seem like the perfect way to ensure their ageing parents have a safe place to live. But there has been a recent spate of Supreme Court decisions in Australia that spell out what happens when things go wrong.

Here is everything you need to know about this type of agreement.

What is a granny flat in this context?

In the context of a granny flat agreement, a granny flat is generally defined as any room or area in your home occupied solely by your parent or parents. In other words, it could be a loft room, a room in your apartment, or even a duplex. Although you can build a separate granny flat or residence, you are not legally obligated to do so.

What is a granny flat agreement?

A granny flat agreement is also known as a GFA, or deed of family arrangement. In the simplest terms, it is a legally binding contract that is usually written as a deed.  It includes stipulations that you (an ageing parent) and your adult child/children (who own the property where the granny flat is located) agreed to regarding your life estate in said property.

In this context, you are considered a tenant. But because this type of contract is a life estate agreement, your interest in the property is valid for the rest of your life.  You can find the definition of granny flat interest in the Social Security Act. Importantly, the tenant does not have to live in an actual granny flat for a granny flat agreement to be applicable. Practically speaking, it could be a bedroom located in the main house.

In the context of the impact of a Granny Flat Agreement on Centrelink payments, there is good information here.

What should be included in a granny flat agreement?

The terms and conditions in a granny flat agreement will vary based on each family’s circumstances. That being stated, there is also some general information that should be included in this type of contract. This includes:

  • The names and other relevant details for each party to the contract.
  • Provisions of the life estate granted to the tenant.
  • Loan provisions
  • Who is responsible for paying for applicable upkeep and insurance.
  • Who is responsible for furnishing the granny flat.
  • Provisions for dispute resolution
  • Who is responsible for payment of utilities and similar expenses
  • Stipulations pertaining to the death(s) of the property owner(s) and its effect on the tenant(s)
  • Provisions for termination or transfer of the granny flat agreement

The difference between a GFA and a lease

At this point, you may be wondering about the differences between a GFA and a traditional lease — or if there are any. The answer is yes. Here is what makes each unique.

First, people who enter into a GFA are related. Secondly, a GFA  protects the tenant’s interest in the property for the rest of his or her life. Conversely, a landlord and tenant who enter into a lease are not usually related. Furthermore, a lease is usually a simple financial contract that provides for the use and occupation of property in exchange for money. As such, it ends on a specific date and includes termination rights.

A  GFA also provides protection for parties to the contract. These provisions typically include benefits for both the tenant and the landowners. However, money is not necessarily the only consideration.  To clarify, let’s consider the following scenario.

Your ageing father gives you money to build the granny flat on your property where he intends to live. You benefit because your property value increases with the addition of the granny flat. You’re father benefits because he gets someplace to live rent-free for the rest of his life.

You could also craft a GFA in which your ageing father provides the money to build the granny flat in exchange for payment for his care. In this scenario, additional provisions would specify the type of and duration of care.  This way, both of you would be fully aware of your contractual obligations.

Other Things to Consider

There’s a minefield of issues that can derive if you don’t take the relationship seriously at the outset. Recent court matters have seen elderly parents being forced out of the granny flat over rows with their children. Resolve these questions in your own mind and then involve a highly-skilled lawyer to construct the agreement.

  • Have we considered what happens if there is a relationship breakdown between our elderly relatives and we want them to move out?
  • How do we treat any contribution by our elderly relatives if my wife and I separate and wish to do a property settlement?
  • If our elderly relatives have made a contribution, how will this be treated in their estate?
  • If we want to sell the property and have seen good growth, how do we treat the contribution and what do we do with our elderly relatives?
  • How will our siblings consider the contribution by their elderly parents and upon their death, how will this be considered in the estate?
  • What is the impact on future capital gains tax liabilities?
  • What is the impact on Centrelink payments?
  • What happens if one of our elderly relatives dies and finds another partner?

Whilst some of these questions may seem farcical, it’s these types of questions that were never addressed and consequently found themselves in a bitter and expensive dispute in the Supreme Courts throughout Australia.

In a recent NSW Supreme Court matter, a lady in her late 60s found herself couch-surfing with friends after the relationship between herself and her daughter and son-in-law broke down and she was ordered to leave the home in which she had contributed close $170,000.

Macquarie University associate law lecturer, Teresa Somes whose research is on this phenomenon found that in the event that the granny flat agreement fails and the adult child is unable or unwilling to repay the contributed funds, the elderly parent is often at imminent risk of becoming homeless, reliant on social housing or the generosity of others.

The effect of a GFA on someone’s Will

Here’s another important point to keep in mind. When you give your adult child money in return for granny flat interest, the money is no longer included in your estate. In other words, once you die, these funds/assets will  not be distributed as per your Will. Accordingly, it is generally best to update Wills and other documents reflect the terms of the GFA. This way there are no nasty surprises when it comes time to settle your estate.

Summing up

Although it may seem unduly complicated, a well-drafted granny flat agreement can actually prevent disputes and costly litigation. It can also help reduce the risk of elder exploitation and abuse.

Back in 2017, the Australian Law Review Commission did a report on elder abuse. Among other things, it determined that informal GFAs left older Australians at risk of homelessness. Specifically, it concluded that informal GFAs put older Australians at significant risk if their relationships with their adult children break down.

If you are an older adult, or the adult child of an ageing parent and you are thinking about a granny flat agreement, it is critical that you get proper legal advice. Regardless of where you are located in Australia, contact one of our Accredited Specialists at Law By Dan today!