Relationships / Family

Reviewing Your Relationship Property Agreement: Nothing Lasts Forever

“Nothing endures but change”

So said Heraclitus some 2500 years ago, and his observation still rings true today.  A relationship property agreement reflects a snapshot of your and your partner’s circumstances at the time it was signed. The recent case of Clayton v Clayton [2015] NZSC 30 sharply illustrates the need to consistently review and update your agreement.

The couple in Clayton began a de facto relationship in 1986 and were married in 1989.  They had two children together.  In 2006 they separated. The parties met when Mrs Clayton worked in the office of a business built up by Mr Clayton’s father.  Mr Clayton had earlier established his own business and later developed a major sawmilling business which purchased the father’s business.  The Clayton cases covered a number of important issues.  This article focuses only on the impact of failing to update an agreement.

In 1989 the Claytons signed a s21 agreement providing that all existing property was separate property, including Mr Clayton’s businesses.  If the marriage ended, Mr Clayton was to pay Mrs Clayton in full and final settlement:

$10,000 if separation occurred in the first year of marriage;
$20,000 if separation occurred in the second year of marriage;
$30,000 if separation occurred in the third or subsequent year of marriage.

Following separation in 2006 Mrs Clayton sought to have the s21 agreement set aside because giving effect to it would cause serious injustice on separation as she would be left with very little despite having contributed to the relationship.  On appeal from the Family Court the High Court Judge agreed and said that although the agreement was probably fair in 1989, “having regard to the time that has elapsed since and the substantial assets which have been accumulated, it has undoubtedly become unfair or unreasonable.”  In part this was due to the fact Mrs Clayton had made a significant contribution to the business by doing office work and forgoing a proper income for that work.  She had also undertaken the major part of childcare and had sacrificed a higher standard of living in order to support the business, which had become very successful.

The starting point for the division of relationship property is equal sharing.  A s21 agreement enables you to contract out of this equal sharing – but not to exclude a future significant change in circumstances.  Had the Clayton’s agreement been updated to reflect what would happen in light of their improved financial circumstances, both parties would have enjoyed greater certainty and protection, not to mention avoiding costly and stressful litigation.

A variation requires both parties to seek independent advice and agree to the variation.  Your partner may not agree to the variation.  A well drafted agreement will enable some degree of "future proofing".  That is why your agreement must be individually drafted to your requirements and if possible provide for a degree of realistic sharing if you are together for many years.

Chambers v Chambers [2015] NZHC 583

This case demonstrates what can happen when a couple has an up-to-date relationship property agreement.  It concerned a couple with significant wealth who each brought children to the relationship. The husband died unexpectedly during the marriage.

The Chambers entered into their first s21 agreement a year after commencing their relationship. The agreement was updated the following year and again ten years later. Their financial circumstances improved over the course of the marriage. A variation to the second agreement (shortly before the husband’s death) introduced the concept of “entitlements” payable to the children of the first deceased at the discretion of the survivor (approximately $2.5m for each child). This entitlement was subject to the surviving spouse being able to “enjoy the parties’ relationship property to the full for the rest of his or her life”.

The Court was faced with a number of claims by one of the deceased’s sons, including a claim under the Family Protection Act for an early payment of his entitlement.  That claim required the second s21 agreement (and variation) to be set aside, with the effect that there would be a 50/50 split of relationship property which would expose the deceased’s 50% share to the son’s claim.

The Court was unwilling to set aside the agreement in favour of the son or replace the carefully worked out discretionary entitlements and replace it with its own award under the Family Protection Act.  The Court accepted that the agreement expressly provided the survivor with flexibility as to how they disposed of the relationship property and in the circumstances, this was not unfair.  In refusing to entertain the son’s claim, the Court simply confirmed that the survivor was required to exercise her discretionary power from time to time and consider the needs of the stepson in light of the deceased’s moral duty towards his son.  Serious injustice could not be shown; therefore there was no need to set aside the agreement.  At the end of the day, the agreement won out.

Lessons to take away

Clayton and Chambers demonstrate that relationship property agreements may not last forever.  They are very much like a will and need updating when circumstances change, for example, when children are born or new assets are accumulated.  If you have recently entered a relationship, it is wise to have an agreement in place.  This agreement must be tailored for your needs and must make provision for greater sharing as your time together increases.  This provides an element of future proofing. Future proofing is particularly important if the parties to a serious relationship are just starting out.

If you already have an agreement, we recommend that you review it regularly (every five years) to ensure it remains a current ‘snapshot’ of your lives.

The cases discussed give the on-going review of s21 agreements an extra dimension. Heraclitus also said that nature is change and in times of constant change, the need for the protection a s21 agreement offers has never been greater.

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