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JUNE 2013

For Richer, For Poorer

Contracting out of the Property (Relationship) Act 1976

The Property (Relationships) Act 1976 (“the Act”) applies to all relationships including marriages, de-facto relationships and same sex relationships. The Act sets out how relationship property will be divided upon separation. The Act provides that where a couple have been in a de-facto relationship, marriage or civil union for three years or longer, there is a presumption of equal sharing of all assets and liabilities of the relationship.  The equal sharing provisions are irrespective of the differing financial contributions of either partner throughout the relationship.  In many cases this includes situations where one party may have brought significantly more assets into the relationship than the other.

Contracting out of the Act

Parties may enter into an agreement to contract out of the equal sharing provisions of the Act (“Contracting Out Agreement”). Such agreements have also been known as “Pre-Nuptial Agreements” or “Property Sharing Agreements”. Parties can either contract out of the Act completely or in part. A Contracting Out Agreement allows parties to reach their own agreement as to the status and ownership of their property and how it should be divided on separation. Parties can make the choice to preserve certain assets as separate property and therefore keeping them safe from the provisions of equal sharing.

Necessary Requirements to Ensure the Contracting Out Agreement is Legally Binding

In order for a Contracting Out Agreement to be legally binding and enforceable it must comply with the following requirements:

  • The Contracting Out Agreement must be in writing;
  • Each partner must obtain independent legal advice before signing the Contracting Out Agreement. This means that you cannot use the same lawyer;
  • Each lawyer must sign the Contracting Out Agreement, certify that they have provided independent legal advice and witnessed their client’s execution of the document.

If these requirements are not met, then the agreement is invalid and the equal sharing provisions of the Act will still apply.

Why is a Contracting Out Agreement Important?

Contracting out of the Act becomes especially important when there is a disparity in the financial positions of the partners. This disparity in the financial positions of the parties arises where one party brings greater net assets into the relationship than the other. A Contracting Out Agreement is also important when it comes to defining what debt will be relationship property.

In the absence of a properly signed Contracting Out Agreement the equal sharing provisions of the Act will apply to assets and liabilities. In the event that the partners separate without entering into a Contracting Out Agreement the effect can be a net transfer of assets from the wealthier partner to the less well-off partner. This can be particularly upsetting for the wealthier partner if that separation occurs close to retirement age where there is limited opportunity to recover financially.

The impact of the equal sharing provisions on the wealthier partner is magnifies if that person has the misfortune of experiencing two or more separations without protecting their interests by entering into a Contracting Out Agreement. This can have the effect of halving that person’s net worth each time they separate from a three year relationship.

A Contracting Out Agreement may also be particularly important where one partner has a child or children from a previous relationship. A Contracting Out Agreement can help protect a partners assets for the benefit of their children.

Inheritances and Gifts

Inheritances and gifts are generally considered to be the separate property of the partner to whom the gift or inheritance was given. However, when for example this gift or inheritance is intermingled with relationship property then it may become relationship property. For example, if the gift or inheritance is applied to repay the loan for the family home and the partners go on to separate, the non-inheriting partner is entitled to benefit from half of the inheritance applied to reduce the borrowing for the family.

Trusts

Assets in a Family Trust are not necessarily protected from potential relationship property claims. In circumstances where the Family Trust was settled during the course of the relationship or where relationship property has been applied to sustain Trust assets, the Trust assets can become relationship property.  This most commonly occurs when the income of one or both partners is used to meet the loan obligations for property owned by the Trust. A distribution received by one partner from a Trust may also be relationship property.  

Can a Contracting Out Agreement be overturned even if it complies with the requirements?

A Contracting Out Agreement will only be overturned on the grounds of “serious injustice”.  This could occur if for example full disclosure of all property is not made by the parties or if due to some circumstance it would result in a serious injustice to uphold the agreement. This could include a birth of a child or if a lengthy passage of time has passed. However, the threshold for having a Contracting Out Agreement overturned is high.

What Should You Do?

A Contracting Out Agreement is fundamental for anyone in a relationship wishing to secure their assets, especially a partner entering into a second or subsequent relationship.  If the necessary steps are not taken to secure your assets then you may risk losing half in the event of a separation.

We have the expertise to advise you on and draft Contracting Out Agreements and urge you to contact us directly to discuss.