Contracting Out Agreements - A Smart Choice
Fact
If you have been married, in a civil union or in a de facto relationship with your partner for more than three years, then you are in a relationship which qualifies for equal sharing of relationship property under New Zealand law.
What does this mean?
Equal sharing means that your partner has an entitlement to half of all assets owned between yourself and your partner, including your family home, chattels, your income and anything you purchase with it during your relationship, except for assets that are your separate property.
Separate property includes any gift, inheritance and property you owned prior to entering the relationship, except where you use separate property to acquire anything for the benefit of the relationship. For example, if you use your inheritance funds, which is separate property, towards purchasing a home with your partner, then the inheritance funds become relationship property and your partner will be entitled to half of it.
On the bright side, New Zealand law allows parties to privately agree how they wish to divide their assets by way of a Contracting Out Agreement.
What is a Contracting Out Agreement?
A contracting out agreement, or more commonly known as a “pre-nup”, allows you to independently agree on how you wish to divide your assets between yourself and your partner, and contract out of the presumption of equal sharing without the involvement of Courts.
A contracting out agreement can be entered into at any stage of your relationship or if you are in contemplation of entering a relationship. For a contracting out agreement to be valid, you must meet all of the following requirements:
1. The agreement must be in writing and signed by both parties; and
2. Each party to the agreement must have had independent legal advice before signing the agreement; and
3. Both parties’ signatures on the agreement must be witnessed by your respective lawyers; and
4. The lawyer who witnesses the signature must certify that they have explained the effect and implications of the agreement to the party before they signed the agreement.
An oral agreement between you and your partner will not suffice as an enforceable agreement. Until a full and final agreement has been executed between you and your partner, your partner can claim for half of your property, even if they say they won’t claim.
A contracting out agreement also simplifies splitting up assets at the end of the relationship. If you do not have an agreement in place, you both will require a lawyer to decide how things will be divided.
Having an agreement in place makes the process simpler. As the agreement is binding, you must follow it. This allows for a quicker solution and saves legal fees.
If you do not have an agreement, it can take months or even years in some cases to decide how things will be split. There will be increased legal fees for arguing your position if your partner wants to change their mind about promises made.
When relationships end, they are not always done on good terms. By making an agreement when you are both in a positive space means that a fair agreement is more likely to be reached. If you do not have an agreement in place and the relationship ends on bad terms, your partner may deliberately slow down the process, refuse to agree to terms, or seek more than they previously agreed to.
Contracting Out Agreements in action
Scenario A: Without Contracting Out Agreement
Mike Ross and Rachael Zane are in a de-facto relationship. Three years ago, they bought a property in Christchurch for a total sum of $300,000.00, towards which Rachael contributed $240,000.00 and Mike contributed $60,000.00.
Mike promises Rachael that as she has worked hard to save the $240,000.00, he won’t go after it if they separated. They move in together. Three years later, after a big fight at work, Mike and Rachael split up. Mike is angry and decides that he wants to claim 50% of their home as he is entitled to under the Act. As the parties did not record their intention for Rachael’s money to remain her separate property upon separation, Rachael is unable to enforce Mike’s promise. To keep the house Rachael is then required to pay Mike $150,000.00 (half of the property’s value). Rachel effectively loses $90,000.00 because a valid contracting out agreement would have meant she would have only had to pay $60,000.00 (Mike’s contribution).
Scenario B: With Contracting Out Agreement
Donna and Harvey contemplate entering a civil union. Donna currently owns a property located in Queenstown and has a mortgage secured against it. Harvey wants to move into the property, and it would become their main home.
Donna knows that separate property can lose its status if it is used for the common benefit of the relationship. So, Donna and Harvey enter into a contracting out agreement recording that the property will remain Donna’s separate property at separation. Four years later, Donna and Harvey separate. As the contracting out agreement was valid and enforceable at law, Donna retains the home as her separate property after their separation as per the terms of their agreement.
Summary
Financial discussions and arrangements can be awkward but they are an essential tool when there is financial disparity that may need to be recognised in the future. Surprisingly, an agreement can often resolve what can otherwise remain the elephant in the room, and allow couples to move forward with clarity. Because of the potential for significant financial impairment if drafted incorrectly, legal expertise is an essential part of the process. Note that the legislation also safeguards you from undue influence and coercion, and it is necessary for parties to seek independent legal advice before an agreement can be certified.