Couples entering marriage, a civil union, or a de facto relationship, may choose to formalise the respective ownership of assets brought into the relationship. This process, known as a pre-nup or contracting out agreement overrules what would be otherwise determined by the Property (Relationships) Act in the event of death or separation.
The PRA presumes that each partner contributes equally to their relationship, even though that may be in different ways, and it aims to provide a just division (almost always equal) of the relationship property when the relationship ends, taking into account the interests of any children involved.
Discussing at the early stages of a relationship how you should divide property if you break up may seem pessimistic, untrusting and even selfish, but anyone who is in a relationship now or who enters a new relationship should give the PRA careful thought. Particularly when there is a significant disparity in wealth or external financial factors.
It is especially important that people who have deliberately chosen not to marry or enter a civil union check with their lawyers to see how this law affects those arrangements. Those who put agreements in place to protect their property (perhaps to preserve it for children from an earlier relationship) or who have set up family trusts should also consider how the PRA might affect those arrangements.
Facts In Brief
The PRA applies automatically to all married and civil union couples and those who have been living together in a de facto situation for a minimum of three years.
It applies to relationships that end after 1 February 2002 even if they began before that date.
It applies whether a relationship ends through separation or death – and it can override the provisions of a deceased partner’s will.
What does a de facto relationship actually mean?
For the purposes of the PRA, a de facto relationship exists only when both parties are aged at least 18 and they are living together as a couple but are not married to each other or in a civil union.
These are the essential (but not the only) factors that go to determining whether a relationship is or has been de facto. The issue of whether there is a de facto relationship in terms of the PRA and the date that it began will be questions of fact for a court to decide if necessary.
In deciding, the court will consider all the relevant circumstances, which may include:
- the length of the relationship
- the extent to which you shared a home
- the degree to which your finances were merged
- how your property was owned and used
- whether you had a sexual relationship
- how you cared for and supported any children either of you had
- who performed household duties
- your mutual commitment to a shared life
- whether others saw you as a couple
- any other matters as seem appropriate.
It is often difficult to determine when a relationship ceases being of the girlfriend/boyfriend type and becomes de facto – yet the date at which two people become “a couple” is significant in terms of when the PRA applies.
If you think your relationship could be classified as de facto and you do not want this law to apply to you, then you will need to contract out of it.
But we aren't defacto we're just flatting together!
As the above factors indicate, people can flat together without their relationship being deemed de facto in terms of this legislation.
However, if people who live together and share costs develop a sexual relationship, they may be classified as de facto.
Both their assets and their debts (possibly including student loans) would be shared equally if their relationship lasts three years or more. The only way to avoid that is for them to make a contracting-out agreement.
What about if our relationship has been relatively short?
The rules for dividing property when a relationship is of short duration (usually less than three years) are different for married and civil union couples from those for de facto couples. When a marriage or civil union of short duration ends through separation, property is generally divided on the basis of contributions to the marriage or civil union rather than shared equally where one spouse’s contribution has been clearly greater than the other’s.
If a marriage or civil union of short duration (even if very brief) is ended by death, it will be treated as a marriage or civil union of long duration. The surviving partner will have the same rights to an equal share of the relationship property, unless the court considers that would be unjust.
An order dividing property under the PRA cannot usually be made if a de facto relationship was of short duration. However, the relationship may be treated as one of three years or more and covered by the PRA where there is a child of the relationship or the applicant has made a substantial contribution to the relationship and the court is satisfied that failure to make the order would result in serious injustice.
In that case, the share would be determined according to the contribution each party had made to the relationship rather than equally.
For other de facto relationships of short duration – whether ended through separation or death – property is usually shared according to the equitable principles applying before the PRA came into force rather than 50/50. These principles take into account who has legal title to the property, each partner’s contributions to the property and the couple’s expectations as to how they should share their property.
Can't I just put all my assets into a trust or company to protect them?
Property transferred to a trust during the relationship can be taken into account if it is considered that the transfer has the effect of defeating the sharing of relationship property (even if it was not intended to have that effect).
The property cannot be transferred back out of the trust but the court can order compensation by adjusting the share of relationship property, by payment from the other partner’s separate property or, if neither of those is sufficient, from trust income, if any.
Where a trust owes a debt to a partner that is an asset that may be classified as relationship property. So may any beneficial interest a partner has in a trust.
Compensation from relationship or separate property may also be ordered where relationship property was transferred during the relationship to a company in which one partner has a controlling interest and that transfer has the effect of defeating the other partner’s property rights.
The solution is a Contracting Out Agreement
The only way to prevent the PRA from applying to your property is for you and your partner to enter into a contracting-out agreement. This allows you to make your own rules about the ownership of your property (including future property) and how it is to be divided when your relationship ends.
Your partner cannot be forced to enter into a contracting-out agreement. You can make a property-sharing/contracting-out agreement whether you are married, in a civil union or de facto and at any time – before you begin the relationship, during it, when you are splitting up and even when a partner dies (in which case you would contract with the deceased’s personal representatives). You can contract out of all or part of the provisions of the PRA.
An agreement can be made to apply during the partners’ lifetimes; for a fixed period and then expire; only after the death of one or both of them; or both during their lifetimes and after death.
You can specify the property you want excluded from the relationship pool (that is, identify the separate property of each party) and how relationship property is to be divided. You can provide for different results according to the number of years the relationship lasts and whether you have children.
Although model forms of contracting-out agreements are provided in the PRA regulations and in some books, we strongly recommend against using these without legal advice. The issues may seem straightforward but complexities can and often do arise in the absense of clear and complete records that comply with the law. Relationship property disputes before the courts or mediated between lawyers can be lengthy and therefore costly.
We have lawyers specialising in the area of relationship property at all of our branches that can guide you on the best solution for your needs, and answer your queries regarding the process before committing to proceed. Once we have scoped your requirements we can also provide you with an estimate of likely costs.