The Property (Relationships) Act 1976 (“the Act’) is the main piece of legislation in New Zealand that deals with the division of property on relationship breakdown.
Section 21 of the Act enables couples to enter into an agreement to “opt out” or “contract out” of the property sharing regime which the Act provides for.
Why contract out?
If a couple have:
- been married for three years or more, or
- been in qualifying de facto relationship for three years or more,
in the event of separation or the death of one of them, subject to a number of exceptions, all relationship property will be divided equally.
However, if a couple have entered into a Contracting Out Agreement, they can agree to a classification and division of property that is different to that prescribed by the Act. A Contracting Out Agreement allows parties to enter into private arrangement to determine the status, ownership and division of their property in the event of their separation, or the death of one party.
These agreements can be made at any stage of the relationship although it is generally advisable to do so before the relationship has become a de facto one of three years, or a marriage of three years.
A Contracting Out Agreement may be advantageous in the following scenarios:
- If one party is bringing substantial assets into the relationship, they can retain those as their separate property;
- It can protect couples from each other’s debt;
- It can protect one person’s business;
- It can protect inheritance and ensure that is kept separate, notwithstanding the use to which it is put.
This is not an exhaustive list.
The benefits of entering into such an agreement can be as follows:
- It can define the share of relationship property each party is entitled to in the event of separation;
- It can define the share of relationship property each party is entitled to upon the death of the other;
- It can provide certainty and security;
- It can help avoid protracted and expensive litigation, in the event of separation or the death of one party;
- It is an open and transparent process as each partner is a party to the agreement.
- Importantly, because each partner is a party to the agreement and must be independently advised as to its effects and implications, one party cannot later try to argue that they did not know the agreement existed, or they did not understand the implications of it for them.
There may be other benefits too, depending on your personal circumstances.
What can / can’t you contract out of?
Parties may contract out as to the “status ownership and division of their property (including future property)”.
Problems may arise, however, when Contracting Out Agreements stray beyond protecting existing separate property in an attempt to protect all future acquired property. The risk with trying to keep everything separate forever, including all income earned and property acquired during the relationship, is that there is no provision at all to create any relationship property. Agreements that attempt to keep everything separate forever can, in the writer’s view, potentially, be at risk from being set aside. In order to “future proof” a Contracting Out Agreement and reduce the risk of it being set aside there should be at least some ability to accumulate relationship property.
An agreement can become unfair due to the lapse of time, the arrival of children, career changes, illness, contributions to separate property, intermingling of assets and not taking the agreement into account when making financial decisions in the future. Therefore, a Contracting Out Agreement need to be flexible to enable, for example, a property to be sold and another purchased in substitution, but not so flexible that the original intention of the agreement is lost.
A Contracting Out Agreement is not for everyone and the Act does not permit unrestricted freedom to contract out. However, a Contracting Out Agreement can be useful for some couples, especially in the early stages of their relationship if one or both parties want to protect separate property, or for couples bringing significant assets into the relationship that they want to remain their respective separate property, or for asset planning purposes.
If you would like further information on entering into a Contracting Out Agreement please contact any member of the family team at Malley & Co.