A Contracting Out Agreement, also known as a pre-nup, is a written agreement that sets out how a couple wishes to divide their property if the relationship ends or one of the parties dies.
Contracting Out Agreements are common when one person enters a relationship with significantly more property than the other, or where there are specific assets that a party wants to keep separate.
While the idea of discussing a pre-nup with your partner or spouse may not always feel like a comfortable topic, it is important that you understand what the law provides for the division of your property without an agreement in place.
If you have been living together as a couple in a “qualifying” de facto relationship for more than three years, you are married or in a civil union, then the rules of equal division of assets under the Property (Relationships) Act 2002 (the Act) are generally set to apply.
At TODD & WALKER Law we regularly get asked about relationship property and how the Act applies to a particular relationship and when. We recommend that to avoid future complications concerning property division you discuss the benefits of a Contracting Out Agreement with a Solicitor.
So, what are some of the key things you should understand about Contracting Out Agreements and relationship property?
What is a “qualifying” relationship?
The Act automatically applies to you if you are married, in a civil union or have been living together in a “qualifying” de facto relationship. The rules are different depending on the length of the relationship. The following factors will be relevant when determining whether the de facto relationship is a qualifying relationship:
- The length of the relationship (more than three years);
- the nature of the shared home;
- whether or not a sexual relationship exists;
- the degree of financial dependence or interdependence between the parties;
- the ownership, use and acquisition of property;
- the degree of mutual commitment to a shared life;
- the care and support of children;
- the performance of household duties;
- the reputation and public aspects of the relationship.
A de facto relationship that has not lasted more than three years is considered a relationship of short duration and different principles will apply.
What happens to my property if I am in a qualifying relationship?
The Act records that if you are in a qualifying relationship, it is assumed you have contributed equally to the relationship, even though it may be in different ways, and equal division of relationship property will apply upon separation or death.
There are two different types of property under the Act; relationship property, which is property deemed to be owned by the couple jointly and separate property, which is owned by either one of the parties.
Relationship property covers the majority of property including:
- the family home, even if it was purchased by one partner prior to the start of the relationship;
- chattels, including furniture, fixtures, vehicles, boats etc.;
- any jointly owned property;
- separate property that has been “intermingled” with relationship property for example if an inheritance is used towards renovations on the family home;
- all income earned and property purchased after the relationship begins;
- Kiwisaver, superannuation and life insurance policies; and
- Debt acquired during the relationship may also be considered relationship property.
Separate property includes:
- inheritance and gifts;
- family heirlooms;
- property owned by a trust; and
- property obtained before the commencement of the relationship.
What can I include in a Contracting Out Agreement?
In a Contracting Out Agreement you can specify whether the property is relationship property or if it is to remain separate property. All relationship property will be shared equally at the end of the relationship unless there is a Contracting Out Agreement that records a different intention.
A Contracting Out Agreement provides asset protection and certainty about how property will be divided upon separation or death so you don’t have to worry about it at the time.
Contracting Out Agreement are common when one person has significantly more property than the other, where there are specific assets that a party wants to keep separate or where the parties have children from past relationships. A common example is where one party has acquired the family home prior to the relationship but the couple has lived there for more than three years together. Other examples are where one of the parties has significant debt that the other does not want to take on or if either party has a family trust.
A Contracting Out Agreement can be specifically tailored to your situation, for example you can specify particular property that is to be excluded from the relationship property pool or it can specify that all of the parties respective property is to remain separate and there will be no sharing upon separation. You can also provide for different results depending on the number of years you remain together and whether you have any children together.
Is a Contracting Out Agreement binding?
There are important requirements that must be complied with for a Contracting Out Agreement to be binding:
- the agreement must be in writing and signed by both parties;
- each party must get independent legal advice before signing the agreement from different lawyers;
- the signature of each party must be witnessed by their lawyer; and
- the witnessing lawyer must certify that they have explained the implications of the agreement before the agreement is signed.
The terms of the agreement must be agreed upon by both parties and one party cannot coerce the other to sign if they do not agree with the terms. That is why it is an important requirement for each party to obtain independent legal advice and to discuss their intentions with their partner, so they do not feel blindsided when presented with an agreement.
When can you enter a Contracting Out Agreement and when should it be reviewed?
You can enter a Contracting Out Agreement at any stage during your relationship, whether you are in a de facto relationship, married or in a civil union, including when you are splitting up.
It is important that once a Contracting Out Agreement has been signed that it is reviewed at least every 5 years to make sure the terms have not become unequal or no longer reflect the nature of the relationship. Any such finding could mean the agreement is set aside by the Court.
Alternatively, the agreement can include what is called a “sunset clause” meaning the agreement is in effect for a fixed period only and after the specified period the agreement will expire. Without such a clause the parties should understand that the agreement will be in effect for the parties’ entire lifetime.
Considerations for a Contracting Out Agreement
The default position under the Act is equal distribution of relationship property which may not appropriately reflect your situation. Considering having a Contracting Out Agreement prepared at the beginning of the relationship will save time and money in the long run if you are to separate and can avoid a drawn-out relationship property settlement.
A Contracting Out Agreement will provide certainty for the future and peace of mind for both parties that the division of your assets are how you both intended these to be.
If you are in a qualifying relationship or have questions concerning Contracting Out Agreements or the division of relationship property, our experienced Relationship Property Solicitors can provide guidance on how an Agreement can be tailored to suit your relationship.