Relationship Property – Contracting Out
Many married couples or people in de facto relationships enter into agreements that set out how their property is to be divided if they should separate or one of them should die. In this article Peter Tatham, a Consultant at our Hornby branch, discusses these agreements and why you may need one.
The Property (Relationships) Act 1976 is an Act of Parliament which applies to de facto couples with children, de facto couples who have been together for three years or longer without children, and married couples and those in civil unions. It sets out how people’s property is to be divided if they should separate or one of them should die.
In broad terms, relationship property is divided equally in most cases and includes the family home whenever acquired, the family chattels (eg furniture, household appliances, vehicles, boats, caravans, etc which are used for family purposes) and anything that is acquired by either or both people during the relationship. Separate property broadly includes anything owned before the relationship began (except the family home and family chattels) and any property acquired from a third party source such as a trust, an inheritance, a gift from other family members or property jointly owned with a person outside the relationship.
If you want to change the way your property is divided either after you separate or after one of you dies, then a Contracting Out Agreement is needed. Contrary to popular belief these do not need to be signed prior to the start of the relationship or prior to getting married or entering into a civil union. They can be signed at any time prior to separation or the death of the first of you.
The purpose of a Contracting Out Agreement is to change the way property is divided, owned, and its status as relationship property or separate property during the joint lives of the spouses or partners, or when one of the spouses or partners dies. They can also change the proportions of relationship property you each receive if there is a separation or a death. A different type of agreement, commonly known as a Separation Agreement but called by the law an Agreement to Settle Differences, is entered into to divide relationship property after a separation.
Why have a Contracting Out Agreement?
Typically people will enter into this type of agreement to make sure the assets they bring to a relationship remain theirs, even if there is a separation or death. The following are some examples.
1. A young couple is buying their first home together.
A young couple is buying their first home. One partner has substantial funds in Kiwisaver, which were mostly but not all accumulated before the relationship began. The other partner has access to money from her parents. Ordinarily these funds would be put into the home purchase, and would be intermingled into relationship property as the family home is always relationship property. A Contracting Out Agreement could say that the amounts each put in from their separate sources will always remain separate property and repaid to each of them as separate property if the house sells.
2. A couple in their 40s have been happily together for 20 years, and have three teenage children
A couple in their 40s have been happily together for 20 years and have three teenage children. The husband is about to receive a substantial inheritance from his mother which will allow the couple to pay their mortgage off. A Contracting Out Agreement could be entered into to enable the amount paid to be considered the husband’s separate property, and returned to him if the property sold or separation or death occurred.
3. A couple in their 50s have recently started living together.
A couple in their 50s have recently started living together. They live in her freehold house. They both have adult children, none of whom live with the couple. In this case a Contracting Out Agreement could say that the home (which would eventually become the family home and be divided equally without an agreement) will always be the separate property of the woman. Safeguards are needed here to protect the interests of the man if he improves the value of the property or her equity in it.
4. A couple in their 60s who both have adult children from previous relationships are considering living together.
He owns a mortgage-free house in Merivale worth $1,500,000. She owns a city apartment worth $500,000, with a mortgage of $250,000. They are looking to sell their respective properties and buy a lifestyle block at West Melton for $800,000. Of this, the woman will contribute $250,000, and the man the rest. In this case they could enter into a Contracting Out Agreement keeping their respective interests in the lifestyle block and any other assets they may each own entirely separate.
These are just some examples. There will be many other situations where a Contracting Out Agreement is desirable.
The Act also allows these agreements to cover what happens with property that is acquired in future. Typically there will be the ability to acquire relationship property together in future, and set out how this should be divided in the event of separation or death. The agreement would also state if any future acquired property is to be considered separate property. Usually this will be property acquired in future from a third party source but it can include property that would otherwise be relationship property such as the income of each party or a share in the increase in value of the family home.
Sometimes separate property will be put into relationship property, for example using an inheritance to repay a mortgage. Our Contracting Out Agreements always allow that money to be returned in the event of a separation or death. It is considered separate property even though it has been put into a relationship property asset.
Trusts and Companies
Generally property owned by Trusts or companies is not considered relationship property. Issues arise if either person receives personal benefits from either a Trust or a company. How these are treated can be included in a Contracting Out Agreement.
The Act categorises debts as either relationship debts which the couple are liable for jointly, or personal debts, which each individual is singly liable for . A Contracting Out Agreement can record whether debts are relationship or personal debts, and can change the legal status of those debts. Usually this issue arises when debts are secured over a particular asset (such as a mortgage over a house or a hire purchase agreement over a bed), or where pre-relationship or business debts are to be recorded as personal debt.
Contracting Out Agreements are enforceable in the same way as any other legal contract. They can only be set aside by the Family Court and only if there is serious injustice to one person or the other.
If you have recently entered into a new relationship or either or both of you are buying or selling property, then you need to consider whether a Contracting Out Agreement is required.
For further relationship advice please contact Peter Tatham at our Hornby office or one of our Relationship Property advisors.