How can I protect the cash I'm lending my brother?

admin
18 June 2014

Q

I want to lend my brother some money so he can make improvements to his house before selling it on. We want to agree that he pays me back when the house is sold and that if he makes a larger profit on the sale because of the improvements, then we will split the additional profit 50/50.Should we have a formal agreement in place?
From
SM/Kent

A

Yes, it would be wise to have an agreement drawn up so you both know where you stand - it's so easy to fall out with friends and family over money.

There are a number of ways you can protect your interest in the property, depending on the circumstances and agreement between you.

A declaration of trust could be drawn up, detailing the amount provided and what you expect to receive in return - whether that's a share on any gain in the property value or simply the return of your money plus interest.

A restriction could then be placed on the register to the title of the property making reference to the declaration, giving future purchasers and lenders notice of your interest and also include a condition that no sale is to take place without your consent.

Or your brother could have a charge registered over the property. If he has a mortgage, he may not need to obtain the lender's consent to do so. Your charge would need to come second in line, meaning that should the lender repossess the property it would take funds to redeem its mortgage first, so you may wish to consider how much equity your brother has in the property.

You may also wish to have him transfer the property to your joint names, which would mean you would have a legal interest in the property.

However, working out how much the improvements increase the property's selling price – if it all - can be tricky, especially at a time when house prices are rising across the board. So consider having the property valued by an estate agent immediately before and after the work is carried out to use as a reference point when deciding your cut.

Helen Hutchison, conveyance expert at Irwin Mitchell