What you need to know about Contracting Out Agreements
It can be difficult to discuss at the start of a relationship how you should divide property if you break up, and many people worry that it may seem pessimistic and untrusting. However, anyone who is in a relationship should give the Property (Relationships) Act careful thought.
How the Property (Relationships) Act works
If you are married, in a civil union, or in a de facto relationship for a minimum of three years, and your relationship ends by separation or because one of you dies, the Property (Relationships) Act will apply to you.
All relationship property will be divided equally following the end of a relationship that has lasted more than three years unless there are extraordinary circumstances. Relationship property includes the home in which you live together as a couple, even if it was purchased by one partner before the relationship began. Relationship property also includes all income earned and generally all property bought during the relationship.
What is a Contracting Out Agreement, and how does it affect relationship property?
If you do not want the equal sharing provisions of the Property (Relationships) Act to apply to you, you will need to make a legal agreement contracting out of it. The correct legal name for this document is a “Contracting Out Agreement”, but it’s also often referred to as a relationship property agreement or “pre-nup” agreement. This agreement allows you to make your own rules about the ownership of your property (including future property) and how it is to be divided when your relationship ends.
Reasons to consider a Contracting Out/Relationship Property Agreement:
Entering into a Contracting Out Agreement can provide key benefits such as:
1. Peace of mind: Having a contracting out/relationship property agreement in place can provide peace of mind for both partners. It establishes clear expectations and reduces uncertainties about how property and assets will be handled, which can contribute to a healthier and more stable relationship.
2. Clarity and certainty: By outlining the division of property and assets in advance, you can avoid potential conflicts and uncertainty in case of a relationship breakdown. Having a clear agreement in place can minimise disputes and potentially save time, money, and emotional stress in the future.
3. Preserving family assets: A contracting out agreement can help safeguard your family assets and prevent them from being subject to division in the event of a divorce or separation. This can be particularly relevant if you have inheritances or gifts that you want to keep within your family.
4. Business considerations: If you own a business or have business interests, a contracting out agreement can protect those assets from being affected by a potential divorce. It can help ensure the continuity and stability of your business operations.
5. Financial planning and security: By discussing and agreeing on financial matters in advance, you can establish a framework for managing your finances during the relationship. This can promote transparency, financial responsibility, and overall financial security for both parties.
Things to think about before starting the process:
When considering entering into a contracting out agreement, there are several important things to think about. Here are some key considerations:
1. Open communication: Discuss entering into the agreement openly and honestly with your partner. Your partner cannot be forced to enter a contracting out agreement. It's crucial to have clear communication and ensure both of you understand the purpose of the agreement.
2. Emotional impact: Recognise the emotional aspect of entering a contracting out agreement. It's essential to approach the agreement with sensitivity and respect for each other's feelings and concerns.
3. Financial transparency: Each partner should fully disclose their assets, debts, income, and liabilities. This ensures that both parties have a comprehensive understanding of each other's financial situation before entering the agreement.
4. Protection of individual assets: Consider what assets you want to protect in the event of a separation or divorce. This may include properties, investments, businesses, or inheritance. The agreement can specify how these assets will be treated and divided.
5. Future financial goals: Discuss your future financial plans as a couple. Consider your respective career paths, income potential, and aspirations. An agreement can address how financial matters will be handled during the relationship and in the event of separation.
6. Flexibility: Consider including provisions for modification or review of the agreement in the future. Circumstances may change over time, so having a mechanism to address such changes can be beneficial.
How to create a Contracting Out Agreement
To be valid, a contracting out agreement must be in writing and signed by both partners. Each partner must have their own lawyer and be properly advised before signing the agreement. Each signature must be witnessed by that lawyer who must certify that they have explained the effect and implications of the agreement.
The cost of the agreement will depend on the complexity of the agreement and the time involved. We can provide you with an estimate of our fees after we understand your individual needs and goals.
Next steps:
If you and your partner have agreed to enter into a contracting out agreement, we suggest that you begin by preparing a list of all property, assets and debts owned by each of you. The next step is to identify which of those assets are to remain separate if the relationship ends, and which assets are to be shared.
Once you’ve created this list (it doesn’t need to be final – we can work through it with you ), please contact us to make a time to talk through the agreement further. If you have any questions before starting the process, we’re also here to answer those.