Disputes relating to granny flat arrangements

Overview: Contracts

The means by which lawyers gather information to advise clients on the likely outcome of their case is to look at reported legal decisions of the courts.

“Your circumstances are similar to the case of Smith v Smith decided by the Supreme Court of Victoria. Based on that I think the outcome of your case will be so and so…….”.

However, although the prevalence of granny flat arrangements is probably increasing, and will undoubtedly increase further in the future, there are very few decided cases specifically on granny flat arrangements.

Nevertheless, there are no specific laws that have been enacted in relation to granny flat arrangements. The granny flat agreement, in the eyes of the law, is no different than any other agreement. The laws relating to contracts apply.

Where an agreement is in writing it is a relatively straightforward exercise to be able to determine what the parties have agreed to.

Where the agreement is not in writing it is a more difficult exercise.

Most contracts do not have to be in writing to be enforceable. The difficulty is that where there is no writing you have to try and work out what the parties actually agreed to. (Note that where there is an agreement involving the transfer of real estate, an agreement has to be in writing to be enforceable.)*

Do families intend to form a binding contract?

Traditionally the law took the view that arrangements between family members were not usually contractual in character or intended to create legal relations. There existed a legal presumption that this was the case, but this presumption could be overturned with evidence to the contrary.

Most modern written granny flat agreements specifically state that legal relations are intended. There is nevertheless a trend in the courts not to apply this presumption and to look more at the circumstances to determine whether the parties intended to be bound by their agreement.

To emphasise the point, it is much easier to determine whether the parties intended to be bound by their agreement if that agreement is in writing.

Disputes (and how to avoid them):

With the increased popularity of granny flat agreements inevitably there will be increased disputes.

The conclusion we can draw from the above is that if the agreement is in writing it will more probably facilitate a speedy, sensible and efficient resolution of the dispute.

If the agreement is not in writing, the opposite may be the case.

To be sure, solicitors have an interest in written agreements because they receive the income from drawing them. It is self-serving for a solicitor to say that an agreement should be in writing. But this practice having been involved in litigation for many years it is more than true to say that the relatively small cost involved in having an agreement drawn up properly will pale into insignificance compared with the enormous cost that would likely result in trying to resolve a dispute where the terms of the agreement are ambiguous.

It is equally true to say that if an agreement is in writing it is less likely that the parties will ever end up in a solicitor’s office. They will look at the terms of the agreement and will be able to determine what is to be done (not all the time, because written agreements can never predict all possible outcomes, but perhaps most of the time). Moreover, the nature of a written agreement means that the parties have had the opportunity to think about what their agreement is and they may well have decided what will happen in certain predictable circumstances.

“A failure to fully discuss the practical terms of the agreement, let alone to put the agreement in writing, leads to ambiguous arrangements and to assumptions that may not be shared by both parties.” **

“A failure to consider the long term consequences of the agreement at the time of forming it often leads to disputes and the breakdown of the relationship between the parties.”**

*New federal government legislation to be introduced (we understand) in July of this year (2021) will require written granny flat agreements to ensure that capital gains tax consequences are avoided.

** Monro, Rosslyn – “Family agreements: all with the best of intentions” [2002] AltLawJI 26; (2002) 27(2) Alternative Law Journal 68