Contracting Out or Prenuptial Agreements

The law if you don’t have a Contracting Out Agreement

If a couple has been in a relationship for 3 years or more and it comes to an end, they will be required under legislation to divide the relationship property equally between them.

This law applies to couples who are married, have a civil union or to any de facto relationship of 3 years or more. 

The relationship property that is equally divided includes the family home and its contents, income, non-personal debt, increases in the value of superannuation, life insurance or other investments made during a relationship.

Property which is not divided if a relationship ends (which is referred to as separate property) includes inheritances, taonga, property acquired before the relationship began, personal debts, and property obtained from a trust. However, if separate property is used for the benefit of both parties, or it becomes intermingled with relationship property, it may in law be considered relationship property.

Why it may be better to take a different approach

Many couples consider that if their relationship were to end, it would be unfair to divide the relationship property equally. For example, if you owned a house before entering a relationship, lived in it as a couple for 3 years and that relationship ended, then the house would likely be relationship property and be shared equally. 

Exploring and agreeing matters in advance of a relationship ending can also avoid complex and lengthy exchanges on matters where classification of property as either separate or relationship is uncertain. For example, if a couple has placed the family home in a family trust, and both are beneficiaries under that trust but there is an unequal debt owed by the trust to the beneficiaries, then legal uncertainty can arise as to the interests of each beneficiary under the family trust. 

The legislation provides for couples to depart from the equal division of property by formally agreeing to a split of property in a way that is specific to them and enables them to agree how to deal with particular items. If the relationship ends, having an agreement in place is likely to reduce the time and cost of a property settlement process. 

How a Contracting Out Agreement works

A Contracting Out Agreement (COA) enables couples to discuss and agree how property will be allocated between them if their relationship ends through separation or death. They both agree to “contract out of” the legislation that provides for an equal division of property and put in place their own agreed rules.

A COA can be agreed at any time during a relationship, though it is usually easier and more practical to have the discussion on what would be a fair allocation, and put an agreement in place, early on in a relationship.

In reaching an agreement that is binding on the couple, it is essential that the factual basis of both party’s property and its value is properly disclosed to each other, and that the agreement is entered into freely and considered fair by both. It must be in writing, signed and witnessed, and both parties must have received independent legal advice from a solicitor.

Once in place it is important to review a COA every few years to ensure it remains fair and up to date. If the circumstances of the parties change dramatically it may make the agreement no longer fair and this opens the possibility of a court setting it aside and distributing property as it thinks is fair.

Alongside a COA each party should have a will and the two documents need to be kept consistent and up to date with each other.

What is the procedure for getting a Contracting out Agreement?

The best way to approach a COA is to begin by talking the idea over with your partner. For some couples, this can be a difficult and uncomfortable step. However, keep in mind that crafting an agreement that you both agree to is likely to be fairer on both parties than one that is imposed by law and does not take account of your circumstances.

If both parties are open to explore a COA, next approach a lawyer. The lawyer’s role at this stage is to listen and to discuss what both parties to the relationship think would be a fair way to treat property if the relationship ended. A complete list of property already held (such as cars, family home, kiwisaver funds, debts) is helpful to make and the lawyer can help explore ideas as to how each type of property should be treated.

From this discussion the lawyer will draft up an agreement that can be further discussed and refined. Once there is a draft that both parties are comfortable with, then one party must take it to an independent lawyer, acting entirely in the interests of that person, to have it reviewed and to ensure that the implications of the agreement are understood and agreed to. The original lawyer can provide the independent advice for the other party.

Following agreed amendments, the document is then signed, and the two solicitors are also required to certify that the two parties have received independent advice. The agreement is then binding on the parties. 

How to get things moving 

Contact LegalFocus Ltd by phone or email and ask for an appointment in respect of a Contracting Out Agreement. It would be best if you choose a time so that you and your partner can attend the meeting together. Click here to see our full range of Legal Services available.