In brief:
- In family businesses, informal promises to pass on property to the next generation can be legally binding if they give rise to a proprietary estoppel claim. If someone has been promised all or part of a property, and has worked to their detriment in reliance on that promise, the courts may step in to enforce that promise.
- Proper succession planning can play an important role in preventing an estoppel claim from disrupting the family business. Clear, written documentation protects both the business and family relationships from costly and divisive litigation.
- Family governance documents should be comprehensively reviewed regularly and immediately after major life events, such as birth, marriage, divorce or death. What was agreed years ago may no longer reflect current circumstances or family expectations, creating fertile ground for disputes.
“One day, all this will be yours.” This familiar promise echoes through countless family businesses – a parent or elder relative assures a younger family member that, if they work hard in the business now, they will in the future inherit the property that forms the essence of the business. The younger relative may work for years for little or no pay, committed to the family business on the strength of that promise and turning down other opportunities as a result.
But what happens if the promisor later changes their mind or leaves the property to someone else? In these circumstances, the promisee (i.e. the person to whom the promise was made) may have a proprietary estoppel claim. As the Great Wealth Transfer continues, we expect to see more of these kinds of disputes arising.
Enforcing the promise
Proprietary estoppel is a legal claim that can make good on a broken promise in the context of proprietary rights. It prevents a land or property owner from denying rights in a property where a promisee has acted to their detriment in reliance on certain assurances and is therefore worse off for relying on the promise. Such claims are often seen in the context of family-owned farms but could arise in any family business which has key property assets. The doctrine can also extend to other proprietary rights beyond interests in land, such as rights in relation to shares, and has also been applied to intellectual property rights.
If successfully established, the court has a wide discretion to craft remedies that are appropriate to the particular circumstances of the case. For example, the court can determine that a party retains a 'life interest' in property and that it is passed to the promisee on the promisor's death, or that a financial award is appropriate in lieu of the interest in the property.
Promises, promises – real-life cases
When will the courts step in to stop someone going back on a promise?
- The unpaid farm worker: Expecting he would inherit it, David worked for 29 years full-time and unpaid on his cousin Peter's farm. When Peter died intestate (without a will), David was left with nothing under intestacy rules. The courts awarded him the entire farm, livestock and equipment.
- The devoted employee: A wealthy landowner took a young man under his wing in his mid-teens, trained him to manage his farm, and repeatedly promised that he would inherit the property. The employee devoted almost 40 years to the farm, before they fell out and he was cut out of the will. The courts granted him property and money equivalent to the property rights he had accrued.
- The disinherited son: A farmer repeatedly told his son over many years that he would inherit a substantial share of the family farm. The son worked for decades on low wages, believing his future to be secured. The father and son subsequently fell out, and the son was disinherited. The courts ruled that the son was entitled to relief. The case went to the Supreme Court, which ultimately gave the parents a choice: either the son received his share of the property on their death, or he was immediately paid a lump sum to reflect his entitlement to a share in the property (the amount would be subject to a discount because he was receiving it before their death).
These cases demonstrate that informal promises relating to future ownership of property can be legally enforceable where someone has acted to their detriment in reliance on those assurances. Courts aim to prevent unfairness (unconscionability) by holding the promisor to their word. However, if a clean break means an earlier payment than promised, then an appropriate discount for that early receipt may be applied
Practical steps for avoiding disputes
There are several steps that family businesses can take to create greater certainty in relation to succession plans:
- Put it in writing: Make sure your documents are fit for purpose and professionally drafted to ensure they achieve your intended outcomes and are legally enforceable. A family charter or constitution should set out the succession mechanism - who gets what, when, and what happens if things go wrong (someone dies unexpectedly, a relationship breaks down, or family members cannot work together anymore). Include how you will resolve disputes – ideally through mediation rather than expensive court battles – and how someone can exit the business if they need to.
- Set clear timeframes: "One day" is not a plan. It is a recipe for confusion and conflict. Be explicit about succession planning and specify when succession will happen (for example, at retirement, at a certain age, or on death). If succession is intended for later, and you want to stay involved in the business during your lifetime, then provide for this in your structure documents. The key is to remove the guesswork; everyone should know what is happening and when.
- Review and update regularly: Review your family charter, wills, and succession plans regularly (at least every three to five years) to ensure they remain fit for purpose. Assess whether promises made years ago are still appropriate and achievable. Update documents after major life events such as births, deaths, marriages, or divorces.
- Communicate clearly: Communication is key. Make plans clear to all family members, not just the chosen successor. Explain the rationale behind decisions to manage expectations and avoid nasty surprises.
- Get professional advice: Seek legal advice, tax advice, and consider family business consultants to facilitate difficult conversations. The cost of professional advice, proper family governance and clear communication now is a fraction of the financial and emotional cost of litigation later. More importantly, it preserves family relationships and ensures that the next generation can build on what you've created.