When do you need a Relationship Property Agreement?

Friday 24 May 2019

Most couples enter into a Relationship Property Agreement in two situations:

1. When they want to vary their rights set out in the Property (Relationships) Act 1976 (“the Act”);
2. After separation once they have reached a settlement of their rights.

Contracting Out Agreements

The first type of Relationship Property Agreements are called “Contracting out Agreements”. They are entered into under Section 21 of the Agreement. The parties are contracting out of their rights under the Act.

These are often entered into at the beginning or in the early stages of a relationship. The following are typical scenarios where parties will enter into a Contracting Out Agreement:

1. Where a party owns the relationship home and wants to ensure that it remains his/her separate property and does not become relationship property by the parties living together;
2. Parents buying or gifting a property or part-share to their child, and the property is to be used as the relationship home. The parents will require the gifted property or part to remain separate property of the child if separation is to occur;
3. Parties who have come out of previous relationships get together, and want to retain assets that they have as separate property. In some cases, the couples may have also trusts and companies. A Contracting Out Agreement may be used in conjunction with agreements between those entities.

The law requires that for a Contracting Out Agreement to be legally enforceable, both parties must receive independent legal advice and have their signatures witnessed by a lawyer.

Each lawyer must certify that before signing, their client has received independent legal advice and understands the nature and effect of the Agreement.

The lawyer must make adequate enquires as to the origin, nature and value of the assets and liabilities of each party and associated entities. The lawyer must explain to the party they are advising the rights the party has under the Act and what rights the party is giving up under the Contracting Out Agreement.

In some cases, Contracting Out Agreements will be entered into before the parties move in together or get married. That can present a certain amount of pressure on one of the parties.

If a lawyer feels that the client is under pressure, the lawyer may advise the client to take time to consider the agreement. If the client declines, then the lawyer is likely to document the circumstances including the demeanour of the parties. This may be used as evidence in future should either party wish to challenge the Agreement.

It is possible to set aside a Contracting Out Agreement. However, Section 21J  of the Act requires a very high threshold to be met. “Serious injustice” needs to be shown before a Court will set aside an agreement.

Where there is pressure on a party to sign the Agreement, it is a lawyer’s responsibility to caution that party of this very high threshold. The party needs to take this into account before they sign.

Settlement Agreements

The other type of Relationship Property Agreements is Settlement Agreements. When parties come to an agreement as to how to divide their relationship assets between themselves after separation, a Settlement Agreement is normally entered into.

In that event, it is very important for the asset and liabilities of the parties to be clearly set out. Valuations are important as the values of the assets and liabilities often determine the amount which is payable by one party to another, or how the assets and liabilities should be divided.

Again, the parties are required to be independently advised for the Settlement Agreement to be enforceable. The parties need to understand their rights under the Act, and how the division of assets and liabilities under the agreement compares with their rights under the Act.

For that reason, it is also important to understand the source of the assets and liabilities, whether they arose before or during the relationship and the contributions made by the parties towards those assets or liabilities. The roles played by the parties during the relationship as well as whether children are involved may also be relevant to the party’s entitlements under the Act. If there are significant discrepancies between the division as compared to the parties’ entitlements under the Act, then the reasons for the discrepancies should be documented clearly. Also, full disclosure of assets and liabilities is vital to the validity of a Settlement Agreement. If any significant information has been withheld, that may well be a ground for the Settlement Agreement to be set aside.

Review of Contracting Out Agreements

It is important to periodically review Contracting Out Agreements. Often at the beginning of the relationship, the parties’ finance is more separate as compared to after they have been together for a long time, especially if there are children involved. A Court is likely to view a Contracting Out Agreement as seriously unjust if it gives one party hardly anything after the parties have been together for 10 years or more years with children involved.

Often it is difficult for a lawyer to suggest a review of a Contracting Out Agreement in the middle of a relationship. The best time to do that is when the parties enter into the Contracting Out Agreement. Parties should be advised that they need to periodically review their agreement to ensure that it will remain relevant and not vulnerable to challenge.

If you have any questions, please contact Teresa Chan at teresa@tchanlaw.co.nz or (03) 477 1069.

Teresa Chan

17 May 2019

The above article is for general information only. For specific advice, please contact Teresa Chan at Teresa Chan Law Limited.