A recent Family Court case highlights the need for Contracting Out Agreements to be reviewed from time to time (also known as “pre-nuptial agreements” or “pre-nups”).
A Contracting Out Agreement allows a couple to agree how their property will be divided in the event of separation and/or death. They are generally used by couples to record property division arrangements that are different to the presumption of equal sharing that applies to couples in New Zealand in the event their relationship ends.
Agreements of this nature require each party to obtain independent legal advice and can be set aside by a Court if giving effect to the agreement would cause “serious injustice”. This is a high threshold and a Court will consider all the circumstances including, the length of time since the agreement was made, whether the agreement was unfair or unreasonable at the time it was made, and whether it has since become unfair or unreasonable in light of any changes in circumstances.
In the recent Family Court case, a husband and wife had entered into a Prenuptial Agreement in 1998 (“the Agreement”), just prior to their marriage. At the beginning of their relationship the wife owned a home in which she had approximately $95,000 equity, together with a mortgage of approximately $90,000. The parties resided in that property together. The Agreement sought to contract out of relationship property laws by protecting the wife’s equity in the home as her separate property ($95,000 or a greater sum in the event the home increased in value/the mortgage was reduced).
In 2012, following a 16 year relationship the parties separated. The home was sold and the net proceeds of sale amounted to approximately $350,000. Pursuant to the terms of the Agreement the husband would receive approximately $87,500 of the proceeds of sale (25%) and the wife would retain the balance (75%). The husband applied to the Family Court to set the Agreement aside. If successful, he would share equally in the proceeds of sale of the family home.
In considering whether the Agreement resulted in serious injustice, the Court held that the Agreement was fair and reasonable at the time it was entered into but that due to changes in circumstances during the relationship, giving effect to the Agreement was no longer fair or reasonable.
The Court considered the various contributions made by each party to the relationship. There were periods during the relationship during which the husband was providing a greater share of the party’s joint gross income (approximately 70%) and also a period during which the wife was studying full-time. The Court stated that “when both parties appear to have contributed equally to the relationship it would be unfair or unreasonable for the wife to receive almost two and half times more than the husband out of their joint relationship property”. Because of this, the Court held that to give effect to the Contracting Out Agreement would cause serious injustice and as a result the Agreement was set aside. This meant that the husband was entitled to share equally in the proceeds of sale of the family home.
In the event the parties had reviewed the Agreement during their relationship, with the benefit of independent legal advice, the outcome may have been different. For example, if they had agreed to vary the terms of the Agreement to reduce the wife’s separate property interest (say to $50,000), the effect of the Agreement in that situation may not have resulted in serious injustice. Reviewing the Agreement in this way would also have shown that the parties had turned their minds to any change in circumstances and had continued to agree that the wife should receive a greater share of the home.
This case highlights the following:
- The terms of an agreement must be fair and reasonable when entered into.
- Adequate independent legal advice is essential.
- Agreements should be reviewed from time to time to consider changes in circumstances.
If you have a Contracting Out Agreement or are considering entering into one, contact our Wellington based family lawyers for further information: Debbie Dunbar, email firstname.lastname@example.org, phone (04) 495 9940 or Maretta Twentyman, email email@example.com, phone (04) 495 8918.
Further information can be found here: