The rules around how property will be divided if a relationship breaks down are set out in the Property (Relationships) Act 1976. The idea is that spouses and partners are expected to share equally in the fruits of their relationship.
If you don’t want those equal sharing rules to apply to your property, then you and your partner can agree to contract out of the law, by signing an agreement. That agreement may be called “pre-nup” “contracting out agreement” “section 21 agreement” or “relationship property agreement” (they all achieve the same result – contracting out of the law).
By doing that you get to make your own rules about what will happen to your property. You can set out who gets what relationship property and also what you will keep for yourself as your separate property. What the agreement won’t do is deal with custody, child support and spousal maintenance issues.
The agreement will bind you both and your estates in the event you break up or die.
Who can contract out of the law?
Any two people who are in a relationship can have a contracting out agreement. Whether you’re married, in a civil union or de facto relationship. Or, if you’re intending to enter into a relationship. So even though its sometimes referred to as a pre-nup, it doesn’t necessary have to be “pre” your relationship. It can be the week you meet or after years of marriage.
If you are under 18 (and not already married or in a civil union) then you will need the court’s approval to enter into the agreement.
The couple in the relationship can be the same-sex or straight.
These agreements aren’t for people who are not in a relationship (or not intending to be), such as flat-mates, friends, or relatives who want to enter into joint ownership of property.
Who should have a pre-nup?
People in these situations should have a pre-nup or should at least be thinking about getting one.
- Couples moving in together; moving in together is a good time to bring it up and deal with it, particularly if one person has more assets than the other. The main driving force with this one can sometimes be the dreaded in-laws wanting to protect family land. For example, if your marrying into a farming family and you are moving in together to live on and run a farm that has been in your partner’s family for generations, then the in-laws may be pushing for a pre-nup to protect the farm so you can’t take half if you break up after 3 years.
- People in second relationships is one of the most common scenarios for needing a pre-nup, particularly if both people are bringing assets to the relationship and want to protect those assets for their children from the previous relationship. These agreements aren’t just for the young, but also for the young at heart. Including, elderly people getting together for companionship or winter relationships. It’s really important they protect their life’s work.
- If one person already owns a house which may become the family home (because you live in it together), for example it might be a rental property you’ve had for years that you decide to live in for 6 months with your partner. Another example, is a case where a husband bought his wife’s bach from her (paid full price). The bach later became the family home & husband had to pay wife half (again) when they separated because they didn’t have an agreement confirming bach was his separate property.
- You can also use a pre-nup to keep any inheritance you receive separate; so you can keep it in your family.
It’s probably easier to ask “who shouldn’t have a pre-nup?” and that’s people getting together without any assets or who are in similar circumstances such as young people starting out, who going to have a family.
Ashton Kutcher and Demi Moore are a good example of who should have a pre-nup.
Demi was previously married to Bruce Willis, they had children together. When they split, presumably they would have taken half each. Demi should now sign a pre-nup with Ashton to protect her children’s inheritance. If Demi dies without a pre-nup, Ashton may get more, and children may get less, than she intended.
It’s far better to deal with it now, and help preserve the family relationships, rather than have them fight it out in court once she’s gone.
What makes a good agreement?
A good agreement will be full of details and documents to support those details. It should record the background to your relationship and list of all the property you want to keep separate – that’s your assets AND liabilities. Because it’s not just your assets that will be shared equally under the Act – you will also be sharing your debts!
You’ll also need valuations of all your assets and some way of verifying your liabilities. If you have a company or trust, your lawyer will need to look at those accounts too. You lawyer needs all of these details because they need to know what everything is worth before they can advise you properly and tell you whether you’re getting a fair deal.
Don’t sign the agreement unless you want to. Although you shouldn’t be pressured into signing an agreement, there is often one person pushing for the agreement, so some pressure will be “normal”. “Normal pressure” itself isn’t enough to cancel the agreement. The courts have said that “normal pressure” includes things such as threatening to quit the relationship or call off a wedding if you don’t sign.
Lastly, don’t sign until you’ve got, and understood, advice from your lawyer. Getting legal advice isn’t just a formality, it’s really important you know what you’re getting, giving up and what you’re risking by signing the agreement.
What are the formalities?
As with most legal documents there are some formalities to meet. The agreement will be void unless it complies with the four W’s:
- It must be in Writing and signed by both parties.
- You must get Way good independent legal advice. That means each person must see a lawyer from a separate law firm.
- That lawyer must Witness your signature and,
- Whatever lawyer witnessed your signatures must also certify that they explained the effects and implications of the agreement to you. That includes advice on what you would be entitled to with or without the agreement (if you broke up or one of you died).
Once you’re all signed up, that’s it, that’s the end of the matter. The agreement will be binding and the equal sharing rules won’t apply to you.
You shouldn’t enter into the agreement thinking “it’s ok because I can have it set aside later”, because it’s just not that easy.
The Court will only set the agreement aside if giving effect to it would cause “serious injustice”.
That’s a really high test, because if it was easy to set it aside then that would defeat the whole purpose of having the agreement in the first place.