Risk Management & Best Practice
LPLC guidance, documentation protocol, and the steps that protect your clients — and your practice.
LPLC Core Rule — Non-Negotiable
Do not act for both the parents and the child in a BOMD transaction. At the point of engagement, before opening the file, decide to act for one side only. Acting for both parties is the single most common source of professional negligence claims in this area and attracts a double excess under the LPLC policy.
There Is No Absolute Gold Standard Guarantee
Even the most carefully documented BOMD loan — executed as a Deed, secured by a registered second mortgage, with interest charged and repayments made — cannot guarantee that the Family Court will include the debt in the s 79 property pool calculation if the couple separates. The court retains a broad discretion under s 79 of the Family Law Act 1975 (Cth) to disregard any liability where enforcement is unlikely or unjust. This advice must be given to parents in writing, and their acknowledgment must be recorded on the file. If parents will not accept this residual risk, the steps required to document that position are set out below.
Do and Do Not
Do
- Decide at engagement who you act for — parents or child, not both
- Send a conflict letter to the unrepresented party at the time of engagement
- Provide the LPLC client brochure at the first meeting
- Advise parents in writing that there is no absolute guarantee
- Advise parents in writing on all risks including family law and enforcement
- Draft the loan agreement as a Deed with a charging clause
- Name all registered proprietors as borrowers
- Post-settlement: register second mortgage if first mortgagee consents; otherwise execute and hold mortgage unregistered and lodge caveat to evidence mortgage interest
- Advise parents to enforce all loan terms actively throughout the loan's life
- Advise parents to renew the agreement if it expires without repayment
- Record all conflict assessments and referral letters on the file
- Integrate the loan into the parents' estate planning
- If parents will not accept the risk, document their instructions in writing
Do Not
- Act for both the parents and the child (or child's partner)
- Assume informed consent cures a genuine conflict of interest
- Facilitate a gift letter to a bank while privately documenting a loan
- Draft a loan agreement as a simple contract if a Deed is available
- Allow a loan agreement to lapse without renewal
- Tell parents that documentation and security alone are sufficient
- Tell parents that a registered mortgage is an absolute guarantee
- Fail to advise parents of the Han & Han enforcement risk in writing
- Lodge a caveat without a charging clause in the loan agreement
- Ignore the estate planning implications of the loan arrangement
- Assume the NCCP Act does not apply without considering the specific facts
- Fail to record your conflict assessment and referral letters on the file
- Fail to document a client's refusal to accept advice or residual risk
Seven-Step Documentation Protocol
When acting for parents
Engagement & Conflict Check
Identify the client as the parents only. Send a letter to the child (and their partner) confirming the firm does not act for them and recommending independent legal advice. If the child refuses ILA, obtain a signed waiver. Record the conflict assessment on the file.
Initial Advice to Parents — Including the 'No Guarantee' Advice
Provide the LPLC client brochure at the first meeting. Advise in writing on: the gift vs. loan distinction and the presumption of advancement; the importance of security (registered mortgage preferred over caveat); the family law risks including Han & Han [2026] FedCFamC1A 54; the bankruptcy risks; the estate planning implications; Centrelink implications if relevant; and — critically — that there is no absolute guarantee the loan will be recognised in family law proceedings regardless of the security held. Obtain the parents' written acknowledgment of this advice.
Draft the Loan Agreement as a Deed
Name all registered proprietors as borrowers. Include all essential terms: principal, interest rate, repayment date, default provisions. Include a specific charging clause and a consent to mortgage clause. Execute as a Deed to secure the 15-year limitation period under the Limitation of Actions Act 1958 (Vic) s 7. Ensure the agreement is consistent with any representations made to the bank — do not facilitate a gift letter to a bank while privately documenting a loan.
Security — Post-Settlement
Preferred: Register a second mortgage on title as soon as practicable after settlement. A registered mortgage gives the parents a statutory power of sale under s 77 of the Transfer of Land Act 1958 (Vic) and priority on the sale proceeds — the Family Court cannot override this without joining the parents as parties. Where the first mortgagee will not consent to a registered second mortgage, the standard practice is to: (1) still draft and execute a mortgage over the property in the usual form; (2) hold that executed mortgage unregistered; and (3) lodge a caveat on title to evidence the mortgage interest and prevent further dealings without the parents' knowledge. The executed but unregistered mortgage preserves the right to register at a later time — for example, when the first mortgage is discharged. The caveat provides immediate, visible protection on title. Advise parents that the unregistered mortgage, while not carrying the same priority as a registered instrument, is materially stronger than a caveat based solely on a charging clause, and that the caveat should be actively defended if a lapsing notice is served.
Advise on Ongoing Enforcement
Advise parents in writing that the loan must be treated as a genuine commercial debt throughout its life. If the agreement provides for interest, it must be charged and collected. If repayments are required, they must be made. If the child defaults, enforcement action must be taken promptly. If the loan expires without repayment, a new agreement must be executed. Obtain periodic written acknowledgments of the debt. Remind parents that a dormant loan — however well documented and secured — will be treated as a gift in family law proceedings (Han & Han).
If Parents Will Not Accept the Residual Risk
If parents acknowledge the advice but will not accept the residual risk that the Family Court may disregard the loan, document their position in a letter of instructions. Record that they have been advised of: (a) the Han & Han principle; (b) the fact that no documentation or security arrangement provides an absolute guarantee; (c) the steps required to maximise (but not guarantee) recognition of the loan. If parents instruct you to proceed regardless, obtain their written acknowledgment that they have received and understood the advice and have chosen to proceed. File this acknowledgment. If parents refuse to proceed at all, advise them that the only alternatives are to provide a gift (accepting the tax and Centrelink implications) or to not provide the funds.
Estate Planning Integration
Review the parents' Wills to ensure they are consistent with the loan arrangement. Advise on hotchpot or equalisation clauses. Review superannuation nominations. Ensure the executor understands the obligation to call in the debt. If the parents die before the loan is repaid, the loan is an asset of the estate and must be collected by the executor — a dormant loan creates risk for the executor as well as the beneficiaries.
Han & Han [2026] FedCFamC1A 54 — The Enforcement Imperative
Facts
The husband alleged he had borrowed approximately $1.8 million from his mother and related companies around 2003. By 2022, the total alleged debt was $4.66 million. The loan agreement contained a charging clause. A caveat had been lodged since 2007. The agreement provided that the husband would sign a mortgage if requested — but no mortgage was ever executed. Interest was only demanded from 2019. No repayments were ever made. No enforcement proceedings were commenced. The parties married in early 2018 and separated in December 2021.
Decision
Austin J held that the court has broad discretion under s 79 of the Family Law Act 1975 (Cth) to assess liabilities. The existence of security (caveat or mortgage) is not conclusive. The dominant question is always the likelihood of repayment being required. The court found the loan was never going to be enforced — no enforcement attempts until 2022, after separation; no proceedings despite default. The court disregarded the entire $4.66 million liability. Austin J also found that the charge was a "mere equity" and that the caveat lodged pursuant to it was itself improper.
The Registered Mortgage Distinction
Austin J expressly distinguished a debt secured by registered mortgage from a debt equitably charged over property, stating: "there is evidently a material distinction between, on the one hand, a liability owed by a spouse to an unrelated commercial creditor (like a bank) secured by registered mortgage over real property and, on the other, a liability owed by a spouse to a close associate (like a family member or friend) equitably charged over the property." A registered mortgage would have strengthened the parents' position — but, as confirmed in Winston & Winston (No 2)[2013] FamCAFC 147, a registered-mortgage–secured family loan is still not automatically recognised. The likelihood of enforcement remains the dominant factor.
Practitioner lesson: You must advise parents in writing that documentation and security alone are insufficient. The loan must be actively enforced throughout its life — interest charged, repayments demanded, and enforcement action taken upon default. A dormant loan will be treated as a gift in family law proceedings regardless of the security held. Failure to give this advice in writing exposes you to a negligence claim.
The Critical Distinction: s 79 Disregard vs. Continuing Security
One of the most commonly misunderstood aspects of Han & Han is the scope of the court's disregard. When the Family Court "disregards" a parental loan under s 79, it is making a discretionary judgment about how to calculate the matrimonial property pool as between the two spouses. It is not extinguishing the debt, releasing the security, or preventing the parents from enforcing their rights separately. The court's order operates in a different legal universe from the parents' proprietary rights on title.
This means that even where a court disregards a parental loan in the s 79 calculation, the following remain true: the borrowing child still owes the money; a registered mortgage still secures the debt on title; the parents retain the statutory power of sale; and the parents can still commence separate enforcement proceedings. The non-borrowing spouse's "share" of the enlarged pool may be awarded by the court, but if the parents hold a registered mortgage, that mortgage takes priority on the sale proceeds — the spouse's award may be unenforceable in practice.
Worked Example — The Practical Tension
| Item | Court Includes Loan | Court Disregards Loan |
|---|---|---|
| Property value | $1,200,000 | $1,200,000 |
| First mortgage (bank) | −$600,000 | −$600,000 |
| Parental second mortgage | −$500,000 | Disregarded in s 79 pool |
| Net pool (s 79 calculation) | $100,000 | $600,000 |
| Non-borrowing spouse's share (40%) | $40,000 | $240,000 (awarded) |
| Sale proceeds after first mortgage | $600,000 | $600,000 |
| Parental mortgage paid from proceeds | $500,000 (priority on title) | $500,000 (priority on title — unchanged) |
| Remaining for distribution | $100,000 | $100,000 |
| Spouse's actual recovery | $40,000 | Up to $100,000 (shortfall vs award) |
The practical result: The Family Court may award the non-borrowing spouse $240,000, but the parents' registered mortgage means only $100,000 remains after the sale. The parents are still repaid (from their security priority), but the non-borrowing spouse's court award cannot be fully satisfied. This is the "bug" in the system — the s 79 calculation and the title priority operate independently. The solution is for parents to intervene in the family law proceedings and seek orders under s 90AE of the Family Law Act 1975 (Cth) to ensure the sale proceeds are applied in a manner consistent with both the s 79 order and their mortgage security.
When Parents Will Not Accept the Residual Risk
Some parents, having received full advice, will refuse to accept that any residual risk exists — or will insist on proceeding on the basis that their documentation and security will "definitely" protect them. This position must be carefully managed. The practitioner's obligation is to advise, not to guarantee outcomes; but the failure to document the client's refusal to accept advice is itself a source of professional risk.
Step 1 — Confirm the Advice in Writing
Send a letter (or email) to the parents confirming the specific advice given, including: (a) that there is no absolute guarantee the loan will be recognised in family law proceedings; (b) the Han & Han principle and the four-factor test; (c) the distinction between the s 79 pool calculation and the continuing existence of the debt and security; (d) the steps that maximise (but do not guarantee) recognition; and (e) the recommendation to enforce the loan as a genuine commercial debt throughout its life. File a copy of this letter.
Step 2 — Obtain Written Acknowledgment
Ask the parents to sign and return a written acknowledgment confirming that they have received, read, and understood the advice. The acknowledgment should state that they have been advised of the residual risk and have chosen to proceed with the loan arrangement on that basis. If they refuse to sign, send a follow-up letter confirming their verbal acknowledgment and file it. Do not proceed without some form of documented acknowledgment.
Step 3 — If Parents Insist on a 'Guarantee'
If parents insist that the arrangement will 'definitely' protect them and refuse to accept any qualification, advise them clearly that no such guarantee can be given and that it would be misleading to suggest otherwise. If they insist on proceeding on that basis, consider whether you can continue to act. A client who refuses to accept accurate legal advice and insists on a guarantee that cannot be given presents a professional risk. Document the conversation, send a letter confirming the position, and consider whether a referral to another practitioner is appropriate.
Step 4 — If Parents Will Not Proceed at All
If parents, having received the advice, decide they will not proceed with a loan arrangement because the residual risk is unacceptable to them, advise them of the alternatives: (a) provide the funds as a gift, accepting the Centrelink gifting/deprivation rules and the estate planning implications; (b) do not provide the funds; or (c) consider a different structure such as a co-ownership arrangement where the parents retain a registered proprietary interest in the property as co-owners, which is not subject to the same s 79 disregard risk as a loan. Document their decision and the advice given.
Limitation Periods — Quick Reference
| Instrument | Period | Authority |
|---|---|---|
| Simple contract loan | 6 years | Limitation of Actions Act 1958 (Vic) s 5 |
| Deed | 15 years | Limitation of Actions Act 1958 (Vic) s 7 |
| Mortgage over land | 15 years | Limitation of Actions Act 1958 (Vic) s 7 |
| Acknowledgment of debt | Restarts period | Limitation of Actions Act 1958 (Vic) s 24 |
| Caveat lapsing notice | 30 days to commence proceedings | Transfer of Land Act 1958 (Vic) s 89A |
Frequently Asked Questions
LPLC Resources
The LPLC provides free practice guidance and client brochures for Victorian practitioners. These resources should be used in every BOMD transaction.