Contracting Out Agreements

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A ‘contracting out agreement’ is known by a few different names, including a ‘pre-nuptial’, ‘pre-nup’, and ‘section 21 agreement’. In short, it is an agreement between two partners in a relationship that defines and declares what property and debts they are individually and jointly bringing to the relationship, and who owns what going forward and in the event the relationship ends.

Why get a Contracting Out agreement?

When a couple has been in relationship for three years or more, whether in a civil union, de facto partnership or in a marriage, the Property (Relationships) Act 1976 (the Act) comes into effect. In very limited circumstances, for example when there is a child of the relationship, that Act can apply earlier.   

While we know what marriage and civil union looks like, the law has a list of factors to be considered to work out whether a relationship is ‘de facto’ and it is more complicated that whether or not you live in the same residence for the entire three years.

When the relationship has been for more than three years, then whatever is ‘Relationship Property’ is divided equally.  What is Relationship Property may surprise you – it includes the Family Home as well as any income, bank accounts balances and retirement funds that have been built up during the relationship. 

Relationship Endings – Division of Assets

The Act applies when a relationship ends and that is either the breakup of the parties or the death of one of them.  The estate or personal representatives of a deceased partner can bring action against the living partner.

This means that without a contracting out agreement – each partner is entitled to 50% of the Relationship Property, regardless of whether or not they made any contributions to the Property or if it was paid for entirely by one party in the Relationship.  The Family Home is usually the main asset of most people and it comes as an unpleasant surprise that it may be at risk if a relationship ends. This is because the law presumes that partners contribute equally to the relationship in terms of money and time.

In limited cases, the court has discretion to order an unequal split of the property pool. This can happen if the court considers that there are extraordinary circumstances that make equal sharing of property or money repugnant to justice.

The court can also make allowances for economic disparities. If one person is going to be significantly worse off going forward due to the relationship ending.

Contracting Out

The way to avoid the 50/50 division of assets is to have a contracting out agreement. In a contracting out agreement, the couple sets their own terms on how they want their property to be owned – both separately and jointly. It generally deals with what should happen on the death of either party and how relationship property should be dealt with on separation.

A Contracting Out agreement needs to be in writing, it has to be signed by both parties who have received independent legal advice before they sign it.  Each of the independent lawyers also certified that they have explained the effect and implications of the agreement.

Common Myths

Here are some common myths about Contracting Out Agreements:

I have been in a relationship for 20 odd years, it is too late for an agreement.

False – you can make a contracting out agreement at any time throughout the relationship, and even after in the event of a separation.

It’s for people who don’t trust their partners.

False – a contracting out agreement should be mutually affirming and should provide clarity and surety for both parties in the event of death or a breakup. Many couples have this document, and it is not a comment on the strength of the relationship.

I don’t want to commit to the terms in an agreement because we don’t know how things might change in the future.

It is a document that should be reviewed and updated regularly throughout the relationship – things change, especially when money, property and kids are involved. You can also mutually agree to cancel the agreement at any time.

Neither of us have any real assets, what is the point of a contracting out agreement?

The Act captures all kinds of property, including inheritances and gifts that you may not know you are currently entitled too. It is still a useful document to have.

More Information

The above is meant to be a guide only, every couple’s situation is different. A contracting out agreement is a very useful protection for both partners in a relationship and can ease the tension that can arise around money issues.

If you are thinking about entering into a contracting out agreement, need some advice or have any questions its time to see a lawyer.

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