Updated: Aug 12
After years of careful saving and contributing to Kiwisaver, Murdoch was excited about buying his first home. On learning that Murdoch’s partner was going to be living in the home with him, Murdoch’s conveyancing lawyer quickly sent him to see me for a Contracting Out Agreement.
Murdoch explained to me he wanted the Contracting Out Agreement to make sure that if he and his partner ever split up, “the home is all mine” and that his partner did not have any claim to it. Murdoch’s rationale was straight forward enough – the relationship was only a year old, he was paying the deposit that he had saved hard for and would be liable for the mortgage. Meanwhile, his partner hadn’t been so prudent and did not have Kiwisaver nor much in the way of savings to contribute.
Contracting Out Agreements are often referred to as “pre-nuptial agreements” but, in reality, you can do a Contracting Out Agreement at any stage of a relationship. They are commonly used to preserve assets as the separate property of one spouse or the other in the event of a separation. We all insure our significant assets against events such as fire, natural disaster and theft. Statistically, you have more chance of experiencing a separation or divorce than those events. Think of a Contracting Out Agreement as a way of insuring your property from relationship property claims in the event of a separation.
As in Murdoch’s case, a Contracting Out Agreement may be entered into because one spouse is making a greater financial contribution to the acquisition of an asset than the other. Some couples will each bring assets of their own to their new relationship. Sometimes they have children from previous relationships that they wish to have benefit from the property they have come into the relationship with. All are situations that can be accommodated for in a Contracting Out Agreement.
Murdoch’s agreement was quickly sorted out with his partner. However, Murdoch was concerned at my advice that the agreement needed to be regularly reviewed, especially when there were significant changes in their relationship or financial situation. He really didn’t want to have to spend more money on the agreement in the future. He particularly struggled with my advice that, over time, he may have to consider providing for his partner to have some interest in the home. I had to caution Murdoch that the protection the agreement afforded him could wither away over time unless it was regularly reviewed and amended to keep up with changes in his relationship.
Agreements that square away the major assets to just one spouse, leaving the other out in the cold, can be vulnerable to being set aside by a Court in the future if giving effect to the agreement would give rise to serious injustice. An agreement that is just today, could become unjust as the relationship evolves. There is only so much crystal ball gazing into the future that we can do when we enter a Contracting Out Agreement. Agreements are particularly vulnerable when a couple simply places their agreement in a drawer to gather dust and their circumstances change over time. As time marches on, contributions (financial or non financial) by each spouse could mean the agreement becomes unjust, particularly if children come into the picture.
This is not to say such agreements are a waste of time. It just means that, like your insurance policies and your wills, they need to be treated as a “living document” if they are to continue to be effective. You don’t just pay your insurance premiums once and forget about the policy. At various times, you will review your insurance cover, sometimes incurring higher premiums, to ensure the policy meets your needs and that you are sufficiently covered. Similarly, you need to review and update a Contracting Out Agreement regularly with the benefit of legal advice to ensure it still covers you if you ever have to bring it out of that drawer.
Thinking of a Contracting Out Agreement? About to move in together? Been living together for a while but concerned to get your affairs in order? Got a Contracting Out Agreement but haven’t reviewed it in years? Drop us an email at firstname.lastname@example.org. We will listen to your concerns and guide you to find a solution that best meets the needs of you and your family.