Do I need a Contracting Out Agreement?

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Relationship / Family

Should I get a contracting out agreement (pre-nup) for my relationship?

While it may not feel like the most romantic conversation to have with your significant other, establishing a mutual understanding when it comes to protecting or sharing relationship property can bring clarity and peace of mind in the event that things don’t turn out quite as planned.

Contracting out agreements, also known as ‘pre-nups’, or more technically, section 21 agreements, are agreements signed by two people in a relationship for the purpose of determining how their property is to be divided if the relationship ends. 

In New Zealand, we often call this a ‘contracting out agreement’ because they have the effect of ‘contracting out’ of the Property (Relationships) Act 1976 (“PRA”). The PRA is the Act which sets out how property is to be divided when you separate from your spouse or partner. By signing a contracting out agreement, you and your partner are agreeing that the PRA (or parts of it) will not apply to you if you separate.

So, do you need one? This will depend on the circumstances of your relationship; however, it is useful to first have a basic understanding of the PRA and what it could mean for you if you and your spouse or partner break up.

Who does the PRA apply to?

The PRA applies to married couples, couples who are in a civil union, and couples who are in a ‘de facto relationship’.

A de facto relationship means two people who live together as a couple for a period of three years or longer. This is putting it simply, and it is important to note that you do not necessarily need to be living together to be in a de facto relationship. For example, you may not live together because one of you lives elsewhere for work.

If you have doubts about whether your relationship is a de facto relationship, you should talk to your lawyer.

What happens if you and your spouse, civil union partner, or de facto partner separate?

If the PRA applies to your relationship, the basic rule is that ‘relationship property’ will be divided equally between you and your partner. ‘Separate property’ will not be subject to division and will remain with whichever one of you owns it. There are exceptions to this however, and it is always best to get legal advice around this.

Separate property includes but is not limited to the following:

  • Gifts.
  • Inheritance.
  • Property (including real estate, shares, vehicles, etc) owned by you before you began your relationship.

Relationship property includes (but is not limited to) the following:

  • The family home (however and wherever acquired);
  • Furniture and chattels in the family home;
  • Income earned during the relationship;
  • Property (including real estate, shares, vehicles, furniture, etc) acquired during the relationship.

This means that if you own your home by yourself and your partner or spouse moves in, when you separate, your partner or spouse will be entitled to 50% of the equity.  If you bought a property before the relationship, but you and your partner do not live in it, that will remain your separate property and you will not need to share in the equity if you separate.  However, if you are in a relationship and you use your income to pay the mortgage on your property, then your partner will have a claim under the PRA, because income is relationship property.

This also means that if some of your KiwiSaver or superannuation has been accumulated during your relationship, that portion is relationship property and will be shared equally if you separate.  The same applies if you have savings in a bank account, if you add to that bank account from your income during your relationship, your spouse or partner will have a claim to your savings if you break up.

What if I have a Trust?

A trust is a separate legal entity, which means any property in a trust is not owned by you, it is owned by the trust.  Therefore, the PRA does not apply to trust-owned property. 

However, if you establish a trust during your relationship, or if you transfer property or funds to a trust during the relationship, that property or all of the trust property may (depending on the circumstances) be subject to claims by your spouse or partner if you break up.

 How do I get a contracting out agreement?

The first place to start is to have a conversation with your spouse or partner about your understanding and expectations about how your property would be shared if you break up. While this is not always an easy conversation, it is better to be on the same page from the outset.

The next step will be to talk to your lawyer. A contracting out agreement must be in writing and each of you must have the agreement certified by an independent lawyer. This means that you and your partner will need to go to different lawyers (from different firms) to sign the agreement.

Contracting out agreements are not ‘one size fits all’, so your lawyer will help you to create an agreement that fits the circumstances of your relationship.

Is a contracting out agreement right for your situation?

The decision to sign a contracting out agreement is a personal one, which will depend on the circumstances of your relationship.  However, as a general rule, we advise people that it is a good idea to have a discussion with your lawyer when you are in a relationship, to better understand what would happen if you and your spouse or partner separate. If you’d like some more information about contracting out agreements, reach out to one of our team who would be happy to chat through your options with you.

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