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We provide expert legal advice on family loan agreements or loan agreements between friends, which are also sometimes described as private or personal loan agreements.
Discussions over borrowing money with those close to you can be difficult and somewhat awkward. However, lack of clarity often leads to disagreements and long term fall outs later, so it’s highly advisable to set things up clearly at the beginning. Affordable, experienced legal advice also often provides an objective input source to lower the awkwardness level.
Whether you're a parent lending money to a child, siblings borrowing from each other, or in-laws providing financial assistance, our experienced solicitors can help you navigate the complexities of these arrangements.
We are experienced in drafting and advising on loans between family and friends, having dealt with over 40 matters in the last year. Our fees are proportionate and our advice practical.
Loans between family and friends are commonly used to assist with property purchases or advances to set up or support the borrower starting a small business. Loans are unregulated provided that they are not business loans, in which case we can advise on the complexities.
We can:
Draft family loan agreements that formalise the agreed terms of the loan while maintaining goodwill between the parties.
Advise on secured or unsecured lending, often in co-ordination with property transactions.
Draft Legal charges and mortgage deeds to secure repayment and advise on any priority and consent issues with existing lenders.
Deal with registration at HM Land Registry and compliance with financial regulations
Drafting fees for a loan agreement average at around £850.00 plus VAT with a similar amount if security documents need to be prepared. each matter is different, so please do call for a discussion on fees.
Clarity and documentation - it's essential to have a clear and well-documented agreement to avoid misunderstandings and disputes.
Interest and repayment – decide and clearly set out the terms such as whether the loan is interest free, or, if interest is payable, the way interest is calculated, whether interest is payable monthly, annually or calculated and paid at the repayment date and whether the loan should be repayable on demand based on certain situations or following a default of some kind.
Security - consider whether to require security for the loan, such as a property charge or personal guarantee.
Tax implications - be aware of the potential tax implications of family loans, especially if interest is charged.
Gift or loan? - decide whether the money will be treated as a gift or a loan for tax purposes.
Property charge - if the borrower owns property, a charge can be created over the property to secure the loan. Be aware however that any charge may need the consent of a 1st ranking charge holder such as a mortgage lender and in reality, the security in real terms of a property 2nd charge will depend on remaining equity after a 1st charge is repaid.
Personal guarantee - can be obtained from a third party to ensure repayment.
Unsecured? - a loan can be made without requiring any security.
Principal amount - the amount of money being loaned.
Interest rate - the rate at which interest will accrue on the loan.
Repayment schedule - the frequency and amount of payments.
Default provisions - the consequences of failing to repay the loan.
Governing law - the jurisdiction that will govern the agreement.
Security and investor-style protections for a loan to family or friends for a business can include :-
Personal guarantee
Charge over Assets - securing the loan with a charge over key business assets (e.g., equipment, IP, or receivables).
Convertible Loan - including a clause allowing the lender to convert the loan (or part of it) into equity/shares under agreed conditions — such as a future funding round or upon default.
Information and veto rights - ensuring regular access to financial statements, business updates, and management information, requiring consent for major business decisions (e.g., new debt, sale of assets, changes in ownership).
Repayment Priority - specifying that the loan ranks ahead of shareholder distributions or other unsecured debts.
Waivers can be a potential risk factor in family loans because they can limit the lender's rights to recover the loan in the event of default. This is because in family or friend loan situations, it is common for the lender to agree not to strictly enforce the terms of the loan agreement.
The problem with this, in legal terms, is that it can constitute waiving of a breach by the borrower which then can result in the lender being unable to enforce further breaches. The way to avoid this is to ensure that any leeway or forbearance is expressly documented as agreed to not waive future breaches and to reserve and preserve the lenders rights in full
It is possible to have an English law family arrangement where a gift can convert into a loan under certain circumstances. This type of arrangement is often referred to as a "gift-over-security" or "revertible gift." The conversion of a gift into a loan can have tax implications for both the donor and the donee. It's essential to consult with a tax advisor to understand the potential consequences.
Common scenarios where this type of arrangement might be used include
Parental gifts to children - parents may give property or assets to their children but want to retain a fallback option in case the child encounters financial difficulties.
Gifts between siblings - siblings may make gifts to each other with the understanding that the gift can be reclaimed under certain circumstances.
While this type of arrangement can be useful in certain circumstances, it's important to carefully consider the potential risks and benefits before entering into one.
If you’d like advice or help preparing a loan agreement between family or friends, including security, convertible terms, or information rights, please get in contact to discuss your options.
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