Section 21 Contracting Out Agreements
Contracting Out Agreements
A Contracting Out Agreement (also known as a “pre-nuptial agreement”) is a written agreement setting out how a couple’s property will be divided in the event of separation and/or death. They are often used to contract out of the general presumption of equal-sharing of relationship property under the Property (Relationships) Act 1976 (PRA).
When you sign a Contracting Out Agreement you are agreeing with your partner that certain sections of the Act will not apply in the event that your relationship ends and your relationship property needs to be divided. If you and your partner do not enter into a Contracting Out Agreement, the Act will govern your relationship property division in the event of separation or death.
An Agreement can cover as much or as little as the couple like – that could be all property they have (including future property), or only certain items of property, but to be legally binding, a Contracting Out Agreement must be:
- Recorded in writing and signed by both parties;
- Each party needs to have obtained independent legal advice;
- Each parties’ lawyer will need to certify that they have given you independent legal advice and have fully explained the effects and implications of the Agreement to you before you signed it.
- The benefit of entering a Contracting Out Agreement is that it will give you and your partner clarity and peace of mind on how your assets and liabilities will be divided in the event of your separation or death.
When should I enter into a Contracting Out Agreement?
An Agreement of this nature can be signed at any time during a relationship. However, it should ideally be signed before the relationship property laws under the Act begin to apply. Generally, that is once a couple have been living together in a de facto relationship, or married, or in a civil union (or any combination of these) for 3 years or more, although there are limited circumstances in which the Act can apply before that point.
Entering into a Contracting Out Agreement can be appropriate when you and your partner are buying a home together and one of you is making a greater financial contribution and you don’t want to divide that asset in equal shares if you spilt up. Another example is where one party enters the relationship with significantly more assets than the other. The other partner may wish to protect those interests such as trusts, businesses or property already owned in their name. Another example is where an older couple chooses to live together in a pre-existing home owned by one partner solely, and that partner wants to ensure the other partner does not become entitled to a half share in that home on separation or death. Inheritance is another area where a contracting out agreement may be appropriate particularly if the partner with the inheritance wants those inherited funds to be protected and to remain separate. Another scenario is where one partner has significantly more liabilities or business risk than the other.
Contracting Out Agreements are not completely failsafe and can be challenged in the Courts, as it is possible for a party to apply to the Court to set aside a Contracting Out Agreement on the basis that it would cause them “serious injustice” if it was upheld. Whilst this is a high threshold to meet, it is very important to ensure that your Contracting Out Agreement is fair for each partner and their circumstances, and to review it regularly to ensure this remains the case in light of changes in your circumstances and developments in the law.
The benefit of entering a Contracting Out Agreement is that it will give you and your partner clarity and certainty on how your assets and liabilities will be divided in the event of your separation or death and it is important to obtain independent legal advice tailored to your individual circumstances, from an experienced professional.