Contracting Out Agreements 101
In New Zealand, there is a general legal presumption that once you have been in a de facto relationship for three years, relationship property is to be divided on a 50/50 basis if you separate or one of you dies. You and your partner can agree to divide your relationship property in a way that is more appropriate for your relationship by entering into a legally binding Contracting Out Agreement (also known as a “pre-nup”).
The Property (Relationships) Act 1976 (“the Act”) sets out how relationship property is to be classified, valued and divided upon separation. The general presumption under the law is that once you have been in a de facto relationship for three years, relationship property is to be divided on a 50/50 basis unless you have entered into a legally binding Contracting Out Agreement. The question of whether or not you are in a de facto relationship is not always “black and white” as this depends on all of the circumstances of your relationship but in essence boils down to whether you are “living together in a relationship in the nature of marriage”. Sometimes, when people separate prior to being de facto for 3 years, there may already be some relationship property entitlements where there are children of the relationship or if substantial contributions have been made to the relationship, but the 50/50 presumption does not apply until you reach the “3 year mark”. However, once your relationship reaches the “3 year mark”, the Act has a retrospective effect in that all assets and liabilities acquired from the start of your relationship will become relationship property and will be divided in accordance with the Act if you do not have a Contracting Out Agreement.
The Act is based on the model of a couple whose relationship commences at a young age with each partner having few assets, and together they build up assets over the course of their relationship. Many couples do not fit this model, for example if one partner is bringing significantly more assets to the relationship than the other partner. Therefore they may wish to make alternative arrangements for the division of their relationship property in the event that they separate.
When you sign a Contracting Out Agreement pursuant the Act, you are agreeing with your partner that certain sections of the Act will not apply in the event that your relationship ends and your relationship property needs to be divided. If you and your partner do not enter into a Contracting Out Agreement, the Act will govern your relationship property division in the event of separation or death.
In order for a Contracting Out Agreement to be legally binding, it must be:
- Recorded in writing and signed by both parties;
- Each party needs to have obtained independent legal advice;
- Each parties’ lawyer will need to certify that they have given you independent legal advice and have fully explained the effects and implications of the Agreement to you before you signed it.
The benefit of entering a Contracting Out Agreement is that it will give you and your partner clarity and peace of mind on how your assets and liabilities will be divided in the event of your separation or death.
Some common examples where a Contracting Out Agreement may be appropriate are:
- Where you and your partner are buying a home together and one of you is contributing significantly more or less than the other, and you do not want the home to be split 50/50 if you separate;
- Where one partner enters the relationship with significantly more assets than the other partner such as interests in Trusts, businesses or property that they wish to protect;
- Where an older couple chooses to live together in a pre-existing home owned by one partner solely, and that partner wants to ensure the other partner does not become entitled to a half share in that home on separation or death;
- Where one partner is gifted or inherits funds that they wish to protect; or
- Where one partner has significantly more liabilities or business risk than the other.
You and your partner can enter into a Contracting Out Agreement at any point during your relationship, however we recommend doing so as early in your relationship as possible. If you are in a relationship and are considering whether a Contracting Out Agreement would be suitable for you and your partner, Holland Beckett Law’s family are more than happy to assist.
Contracting Out Agreements are not totally ‘watertight’ but they are the best available protection from relationship property claims. It is possible for a party to apply to the Court to set aside a Contracting Out Agreement on the basis that it would cause them “serious injustice” if it was upheld. Whilst this is a high threshold to meet, it is very important to ensure that your Contracting Out Agreement is fair for each partner and their circumstances, and to review it regularly to ensure this remains the case in light of changes in your circumstances and developments in the law.
The above information is intended as general advice only. For advice on your own specific circumstances please contact one of our specialist family lawyers – you can find our team and their contact details here: Holland Beckett Law