Posted by Clinton Light on November 29 2017
What’s love got to do with it?
As a new couple blissfully in love, negotiating a legally binding property agreement with your loved one is not usually high on your “to do” list!
But, love and financial sense are not incompatible. You should consider a contracting out agreement, also called a pre-nuptial agreement, if one of you has more assets than the other person in the relationship.
It’s easier to do than you may think. Looking on the gloomy side, if you separate, it’s going to make the process easier, save on lawyers’ bills and ultimately be less financially painful.
Why should we have a contracting out agreement?
A contracting out agreement allows a couple to keep their own property as separate property, without it becoming relationship property.
In another blog article we explain the difference between separate property and relationship property. As we explain in this article, separate property is often mixed with relationship property or used as relationship property (for example, living together in a separately owned house) and therefore loses its status as separate property. This means that on separation or death, the property will be treated as relationship property and divided between the partners.
To avoid this situation, the couple should consider entering into a contracting out agreement. The couple can specify the property that they each want to keep as their separate property. If the relationship ends then they keep their separate property and the relationship property is divided equally.
One size does not fit all
There are different forms of contracting out agreements, with no single agreement being right for everyone.
As a broad brush approach, younger persons may only want to keep one or two items that they owned before the relationship separate and treat the rest of the property as relationship property while older persons may want to keep all or most of their property separate.
An agreement that could be appropriate for some is to “freeze” the separate property as at the date of the start of the relationship or the date when the contracting out agreement is entered into, but the couple can still acquire relationship property together.
Another type of agreement would keep all of the property separate so that very little or no relationship property is created during the relationship. This type of agreement could be appropriate where the parties are older and they do not plan to have children together.
Even if the amount of separate property that a partner wishes to keep separate is relatively small, it could still be worthwhile having a contracting out agreement. A fairly common situation is where a person has some net equity in a property and wants to preserve that net equity as his or her separate property. The agreement could provide that only the net equity is separate property and all of the other property is relationship property. This could be appropriate where the couple is starting out with limited assets and they hope to build up joint assets that they will share.
There is a danger that if the contracting out agreement is unfair, a Court can set aside the agreement if it would cause serious injustice. It is unlikely that the Court would set aside an agreement that only provides that the parties will retain as their separate property the property that they owned at the start of their relationship. On the other hand, it is likely that the Court will set aside an agreement as unjust if the property is all or mainly separate property, the parties have been in a long relationship and there is a severe disparity in assets at the end of the relationship.
A contracting out agreement is not legally binding unless the agreement is in writing, signed by both parties and witnessed by an independent lawyer for each party. Each lawyer must give the person signing the agreement legal advice on the nature and meaning of the agreement.
The usual procedure is for one of the lawyers to draft the agreement. A lawyer with a different firm then advises the other party to the agreement.
It may sound complicated, but it isn’t really. We would love to talk to you about tailoring a contracting out agreement to suit your situation.
Clinton Light, Associate at Young Hunter
Steph Gifford, Associate at Young Hunter