What is a contracting out agreement (AKA a Pre-Nup)?

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WHEN, WHY AND HOW YOU SHOULD CREATE A CONTRACTING OUT, OR PRE-NUPTIAL, AGREEMENT

If a couple is married or has been living together for three years or more and decide to separate, then division of their property will be decided by the Property (Relationships) Act 1976 (PRA). If the couple does not want that to happen, they’ll need to sign a formal and binding legal document called a contracting out agreement (also known as a pre-nuptial agreement or “pre-nup”) to opt out of their obligations under the PRA.

People who aren’t going to get married but intend to stay together can also sign a contracting out agreement.

Why enter a contracting out agreement?

The PRA classifies property as either relationship property or separate property. All relationship property is divided equally regardless of source or unequal contributions. The PRA says that financial and non-financial contributions are equally valid. Whether you are a breadwinner or homemaker, you are part of a partnership of equals.

That model might not suit some relationships. There are also some provisions in the law which, while well-intentioned, can lead to unfair outcomes. For example the PRA divides the family home in equal shares regardless of source. In many cases no harm is done because the home is a “product of the relationship” – but in other cases the home the parties live in was bought and paid for by one party well before the relationship began, and the couple didn’t build up the equity together.

These days a lot of the “ick factor” has been removed from contracting out with your partner – because people increasingly recognise that it is reasonable and fair to have a “no surprises” policy, rather than allowing for the PRA to potentially lead to some unexpected and unwelcome outcomes if a relationship ends (by separation or by death of one of the parties – the PRA can apply on death as well as separation).

Some of the most common reasons to sign a contracting out agreement are:

  • a couple purchases a home together but contributes unequally to the purchase price
  • one party enters the relationship with significantly more assets than the other or a much higher earning power
  • one party receives inheritance during the relationship that they wish to protect
  • one party owns a home prior to the relationship and the couple now use this home as their family residence, or
  • a person is entering into a second relationship and they have children from the prior relationship – they want to preserve their property so it can be inherited by their children.

The common factor in all these situations is that the provisions of the Act don’t suit the particular circumstances and lifestyle of the couple wanting to contract out.

When is the right time to get a contracting out agreement?

It is generally a good idea that an agreement is formed before the default regime of the Act begins to apply (generally this is three years after the parties began living together as a couple). This is because, once the default regime applies, little can be done in the way of asset protection if one party decides they do not want to sign the agreement.

It is worth noting that “living together as a couple” does not necessarily mean living under the same roof. There are cases where judges have held two people are living together as a couple despite living physically apart in separate residences. The policy is that people shouldn’t be able to evade the PRA by keeping a separate residence. 

What process must be followed?

Parliament recognised that the provisions in the PRA don’t necessarily work for everyone, so it included a process in the law for “opting out”.  But to prevent the abuse of power dynamics in some relationships, the process includes some steps that need to be strictly followed if the contracting out agreement is to be binding. The most noteworthy step is that each person is represented by their own independent lawyer – who must give meaningful advice to their client about the effects and implications of the agreement before signing.

To create a valid contracting-out agreement a number of formalities must be followed. These are:

  • the agreement must be in writing and signed by both parties
  • each party must be given independent legal advice before signing
  • the signature of each party must be witnessed by a lawyer, and
  • the witnessing lawyer must certify that they explained to the party the effect and implications of the agreement.

These requirements should not be taken lightly. The Courts are very strict on holding that if a party is not fully advised by an independent lawyer of all the good and bad of entering the agreement, then it will be considered void.

Decent lawyers take their responsibility very seriously because if the agreement is held void due to inadequate advice then they can be sued by the person who suffered loss as a result of the defective agreement.

Can’t I just sign a document with my partner? Do I really need the cost of having lawyers involved ?

You can sign a DIY document with your partner but unless two independent lawyers have certified the agreement then it will not be binding. Lawyers also add value because they have formal drafting skills that allow them to draft a document that doesn’t contain ambiguous words or phrases – which are a recipe for conflict later on. 

But I have a trust – so why should I bother with a contracting out agreement?

Trust law has evolved a lot over the last 20 years or so, and continues to swing against trusts in the relationship property sphere. A contracting out agreement provides more protection than a trust.

Are contracting-out agreements water-tight?

Even if a contracting-out agreement complies with the above formalities, it still is not completely water-tight. An agreement can be set aside if upholding it will create a “serious injustice”. This is some significant disadvantage to a party that goes well beyond mere unfairness. This disadvantage could arise where the original terms of the agreement are inadequate or do not account for factors that arose after the agreement was made.

Our team of relationship property lawyers are experts at ensuring that your agreement complies with the requirements of the Act and the terms of the agreement are future-proof. We can help with a range of agreements from those entered into by first home buyers to complex agreements that cover succession planning, trusts and other asset structures.

WRMK Lawyers has a highly experienced, specialist relationship property team who can discuss whether a contracting out agreement is right for you.  Please give us a call and we will be happy to assist. You can view our relationship and family property lawyers here.

Our thanks to Kezia Purdie for writing this article.