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Whether you call them property settlement agreements, contracting out agreements, pre-nuptial agreements, or something else, they all amount to the same thing – an agreement made between two persons who are in or about to enter into a personal relationship. The relationship may be a marriage, a civil union or a de facto relationship. If the agreement deals in any way with the ownership of property the Property (Relationships) Act 1976 (PRA) applies to the agreement.
Section 21 of the PRA permits couples to “contract” out of the provisions of the Act. You do not have to accept what the Property Relationships Act says about the distribution or ownership of your property, if the relationship breaks down or someone dies. You can agree to something else. However, like most legal matters, in practice it is not that simple.
For a start, unless the agreement complies with the statutory requirements set out in the PRA Act it will be worthless. The major requirement is that each party must receive independent legal advice about the effects and implications of the agreement before it is signed. Independent means that there must be different lawyers from different law firms who fully and carefully advise each party about the agreement they are proposing to enter into. It is not a case of putting the agreement under the nose of the nearest lawyer, telling the lawyer you are happy and asking them to witness your signature. That approach happened a bit many years ago and the Law Reports are full of cases of lawyers being sued for professional negligence and being rapped over the knuckles by judges for not doing enough. Expect the lawyer to ask many questions about the relationship and to ask for a full list of all possible or potential relationship/separate property. Your lawyer will probably want to see valuation details for major assets too.
Also remember that property can include such things as future interests in superannuation funds, Kiwisaver and insurance policies. Special rules affect inheritances, gifts and family treasures (taonga). All possible property needs to be taken into account and assessed when preparing a property relationship agreement.
Much like your will you cannot guarantee that a property relationship agreement will be 100% watertight and withstand every challenge. The PRA provides that the Family Court can set it aside at a later date if, “to give effect to the agreement would cause serious injustice.” Clearly the more an agreement departs from the now well established presumption of equal sharing of relationship property and the greater the inequality, particularly if that inequality remains no matter how long the relationship lasts, the more likely it is that the agreement might be successfully challenged. As the Court can look at changes that have occurred since the agreement was made you need to do a bit of “crystal ball gazing” and think of where the relationship might be in ten years time and not just enter into an agreement that only deals with the here and now.
It is difficult to give specific examples, but you need to be aware that the Court will take many factors into consideration in determining whether there is serious injustice. It is a weighing up exercise, balancing the desirability of a couple having contractual certainty about the future ownership of their property against the whole issue of fairness. Couples can agree in advance to depart from 50/50 sharing, or agree that some property that under the PRA would normally become relationship property after three years remains forever separate, but the extent to which this is done and the reasons need to be carefully considered by the parties and their separate legal advisers.
Usually agreements that simply preserve the separate ownership of assets that each party owned before the relationship commenced do not cause too much difficulty. It can become tricky if a separately owned asset becomes the new family home or the non-owning partner starts making contributions to the other’s property.
Older couples entering into second or subsequent relationships should most definitely enter into contracting out agreements. It should be borne in mind that agreements defining ownership of property are usually binding after death and may have a considerable bearing on estate administration, and even the possibilities of challenges to a will by children. If your partner dies you do not want to spend a year or two arguing with the children of the first marriage about who owns the house you are living in.
© Terry Carson - February 2010
Disclaimer: The information contained in this article is of a general and summarised nature only. It should not be used as be used as a substitute for personal legal advice.