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Contracting Out Agreements
Published in
January 2024
Do You Need One?
The idea of a contracting out agreement can hardly be considered a romantic notion and is somewhat at odds with the hope that a relationship will endure. However, more people are taking a pragmatic approach and entering into such agreements to provide some certainty in the unfortunate event of death or separation. These agreements clarify the property ownership of each party to a relationship, saving confusion or arguments if the parties need to split their assets at a later date.
What is a contracting out agreement?
In New Zealand, the Property (Relationships) Act 1976 (“PRA”) determines how property is to be divided when a relationship ends. In general, the PRA presumes that both partners contribute equally to the relationship, and it aims to provide a just division of assets and liabilities upon a relationship ending. The PRA applies to those couples that are in a qualifying de facto relationship, civil union or who are married.
Section 21 of the PRA enables couples to contract out of the PRA and enter into a private agreement to determine the status and ownership of their property (including future property) and how that property is to be divided if their relationship ends. These Contracting Out Agreements (also known as pre-nups, relationship property agreements or section 21 agreements) can deal with specific property (such as a house or cash) or all property owned by each party.
What happens if you don’t have one and you separate?
If you are in a qualifying relationship and separate without a section 21 Contracting Out Agreement in place, the default provisions of the PRA will apply. Subject to some exceptions, ‘relationship property’ will be divided equally between a couple, and ‘separate property’ will be retained by whichever party owns that separate property.
Relationship property includes (but is not limited to):
1. The family home (whenever this was acquired);
2. Chattels in the family home;
3. Income earned during the relationship; and
4. Property acquired during the relationship.
For example, if Party A owns a house when the relationship began and Party B moves into the house to live together as a couple, upon separation, Party B may be entitled to half of the equity in the home.
Why do you need one?
We often see couples entering into Contracting Out Agreements when:
- Each party has built up their own separate wealth which they want to ring-fence and protect – typical in ‘later in life’ relationships;
- There is a significant disparity in wealth between the parties;
- A young person has received a gift, loan or advanced inheritance from their parents to purchase their first home with their partner, and they wish to ring-fence this and set out how they will share in any increase in value of the home;
- Either party has children from a previous relationship whose prospective inheritance they wish to protect;
- A party is expecting to receive gifts, inheritance or distributions from a trust or company which they wish to protect;
- Simply wishing to provide certainty and security regarding their property affairs.
If you and your partner are relatively young and/or are coming to the relationship on equal financial footing, there’s probably no real need to enter into such an agreement, particularly given the costs and time involved.
When should you get one?
Couples may enter into these agreements in contemplation of a relationship or during an ongoing relationship.
We suggest entering into agreement before your relationship (whether it be a de-facto relationship, civil union, or marriage, or a combination of these) has lasted three years, as this time-period triggers a change in your entitlements under the PRA.
How do I go about getting a contracting out agreement in place?
As unappealing as the prospect may be, the first step is to have a conversation with your partner about your expectations around the division of your property if your relationship ends.
The earlier in your relationship that you have the conversation with your partner, the more willing they may be to agree to enter into such an agreement – it can be a bit trickier to get a reluctant partner on-board if you’ve been together for a long time and suddenly spring the idea of a contracting out agreement on them.
The next step is to speak to your lawyer who can draft the agreement and tailor it to fit your circumstances. For these agreements to be binding, they need to meet specific requirements set out in the PRA. Importantly, the agreement needs to be in writing, each party is required to receive independent legal advice on the agreement, and their signature must be witnessed by a lawyer. The lawyer must certify that they have explained the effects and implications of the agreement to their client before it was signed.
We encourage you to contact Lockhart Muir to discuss your options.