A recent high-profile ‘divorce’ case has stirred controversy among both the legal profession and the general public. The Supreme Court decision in Rose v Rose earlier this year gained a fair amount of media attention and prompted strong responses both for and against the ruling.
The Property (Relationships) Act 1976 (‘Act’) defines both relationship property and separate property. Property owned by a partner before the relationship began and property inherited by a partner are both, prima facie, the separate property of that person and owned by that person solely. However, there are several sections in the Act which can cause separate property to ‘become’ relationship property and therefore be subject to division between the partners at the end of their relationship.
The case of Rose v Rose focuses on these sections and provides some insight into how these provisions will be applied by the courts in the future.
The Roses’ Story
Mr and Mrs Rose were married in 1979 and separated in 2003. Before the marriage, Mr Rose owned a block of farmland known as ‘Cloverlea’. He was also in a partnership with his father, Arthur, and brother, Peter, which carried on a farming business on Cloverlea and on two other blocks separately owned by Arthur and by Peter. Because the farming activities ran at substantial losses during the 1980s, the two brothers each sold a large section of their land in 1989 to reduce debt. However, the remaining land had potential for growing grapes and they later began to develop vineyards on each of their properties.
Arthur Rose died in 1995 and the two sons inherited, equally, the majority of his property (known as ‘Poplars’) and also his share of the farming partnership. In 1999, they sold part of Poplars to reduce debt and a vineyard was developed on part of the remaining land. The partnership continued to make losses during Mr and Mrs Rose's marriage and even after their separation. However, by the time the case was heard at the Supreme Court in 2009, the wine growing business was profitable and, even before that, the value of the blocks of land had increased considerably due to Marlborough’s international reputation as a wine growing area.
Mr and Mrs Rose lived in the homestead on Cloverlea during their marriage. Mrs Rose had previously been married and she brought to the marriage with Mr Rose most of the household chattels, the sum of $10,000 and two children. The $10,000 was spent during the course of the marriage. Mr and Mrs Rose later had two more children and Mrs Rose carried out the normal functions of a mother and ‘undertook all domestic duties expected of a farming wife’. In 1985, Mrs Rose obtained a job as a salesperson, earning an average salary, which was applied entirely to the support of the household, or otherwise within the domestic relationship.
Mr Rose worked long hours in the partnership and the vineyards. In 1989, part of Cloverlea was sold and the money was used to reduce debt and for family purposes. Mr Rose drew annual earnings from the partnership to support the family. However, as the partnership was running at a loss for most of the time these earnings were in fact funded by increased partnership borrowings. The partnership borrowings were secured by mortgages over the properties of the two brothers. In Mr Rose's case, the mortgage security included the homestead on Cloverlea.
The Family Court found that Cloverlea had increased in value by $911,473 during the marriage. Since the death of Arthur Rose, Mr Rose's inherited share in Poplars had increased by $760,000. The book value of the partnership assets (which included all the grapes on the three properties, but did not include the land upon which the partnership business was conducted), was $2,619,937 but the partnership debt was $2,712,990.
Mrs Rose's claim
Mrs Rose’s claim was divided into three separate claims under the Act. Her first claim was over the partnership which owned and planted the vines and ran the vineyard business. The second claim was over Poplars, the section of property inherited by Mr Rose from his father. The third claim was over Cloverlea, the property owned by Mr Rose before the marriage.
The Partnership
Mrs Rose argued that her husband's interest in the partnership was relationship property under section 8(1)(e) (property acquired after their marriage began) or section 8(1)(ee) (property acquired for the common use or benefit of the family) of the Act. She accepted, as part of this claim, that the partnership debt was a relationship debt.
Mrs Rose argued that the partnership business was effectively Mr Rose’s job by which he earned income and provided for his family. There was evidence from Mr Rose’s own testimony that the vineyard development was intended for common benefit and that he thought of the vines as being owned by him and his wife, together with his brother. He also claimed that the partnership debt was a relationship debt, which implied that the partnership assets were relationship property.
The Supreme Court held that it was a reasonable inference that the vineyards assets were being acquired for the common benefit of Mr and Mrs Rose and therefore held that Mr Rose’s share of the partnership was relationship property.
Poplars
As Mr Rose's share of Poplars was inherited from his father, this was his separate property. Mrs Rose claimed against the increase in the value of Poplars under section 9A(1) of the Act. This section states that if any increase in the value of separate property is attributable (wholly or in part) to the application of relationship property then the increase in value is relationship property.
The Supreme Court acknowledged that some of the increase in value may well have been the product of inflation or a general rise in the value of land in Marlborough but stated that this did not defeat a section 9A(1) claim if some part of the increase (that is more than trivial) is attributable to the application of relationship property. As Mr Rose's share in the partnership was assessed by the Court as being relationship property, and the increase in value of Poplars since 2000 was attributable in part to the partnership (being relationship property), the increase in value was therefore relationship property to be divided equally between the parties.
Cloverlea
Mr Rose owned Cloverlea before the marriage and this too was his separate property. Mrs Rose claimed a share of the increase in the value of Cloverlea under section 9A(2) of the Act. This section provides that if any increase in the value of separate property is attributable (wholly or in part and whether directly or indirectly) to the actions of the other spouse, then the increase in value is relationship property, with the share of each spouse to be determined in accordance with the contribution made.
Mrs Rose asserted that the increase in value of Cloverlea was in part attributable to her actions in caring for the children, in managing the household and in earning a substantial portion of the household income. She argued that her domestic contributions allowed Mr Rose to work long hours in the farming business and the development of the vineyard on Cloverlea. She also claimed that if she had not contributed her income to the household it is probable that the husband would have been forced to sell Cloverlea due to the level of debt by the end of the 1980s.
The Supreme Court held that the inclusion of the words ‘directly or indirectly’ in section 9A(2) was intended to remove the need for a claimant to show a direct physical connection, such as work on the separate property, or a direct financial contribution, such as a payment for an improvement to it. It is enough for a claimant to establish that he or she has indirectly contributed to an increase in value and that will be so: ‘when the claimant's actions have enabled the other spouse to devote labour or expenditure to his or her separate property with a consequent increase in value. It will also be so when the claimant has provided financial support by paying for household expenditure and thereby enabling the owner of the separate property to pay for work on it which increases its value’.
By her work both inside and outside the home Mrs Rose enabled her husband to spend long hours on the partnership and allowed him to moderate his drawings so that more money (or in reality more borrowing capacity) was available to the partnership for the development of the vineyards, including the vineyard on Cloverlea.
Unlike section 9A(1), this section does not provide for automatic equal division of relationship property. Therefore, once the Supreme Court had decided that the increase in value was relationship property it had to determine the shares in which that property would be divided between the parties. The Court found that Mr Rose’s contribution to the increase in value was greater than that of his wife and so awarded Mr Rose 60% and Mrs Rose 40% of the increase in value of Cloverlea.
The Controversy
This decision has caused strong reactions by those both in support of and in opposition to the ruling. Anthony Grant, a barrister at Radcliffe Chambers and regular contributor to NZ Lawyer magazine, has written several articles criticising the decision. He has also appeared on TV One’s Close Up and been interviewed by the NZ Herald on the subject. He has been particularly disapproving of the success of Mrs Rose's claim against the increase in value of Cloverlea, dubbing it ‘annihilation by stealth of separate property.’ He argues that it is hard to conceive that Parliament intended that ‘housekeeping’ could create a claim against separate property.
However, those in support of the decision argue that this was a fair result. Mr Rose worked long hours on his separate property and Mrs Rose supported him in many ways which enabled him to do this. In effect, ‘she subsidised the husband in his work for his separate property’. It must also be noted that it was the increase in value of the separate property that was classified as relationship property, not the separate property itself. Furthermore, in regards to Cloverlea, the Court recognised Mr Rose’s greater contribution to this increase in value by awarding him 60% and Mrs Rose 40%.
Regardless of the debate surrounding the fairness of the ruling, it is clear that this decision will have implications for the ways in which people structure their property ownership during relationships. From the point of view of those with substantial separate property assets, this case is a perfect example of a situation where a family trust and an up to date and reasonable relationship property agreement would most likely have provided greater protection for separate property assets. Trusts and agreements do not provide an impenetrable defence against relationship property claims but they may provide greater protection than was afforded to Mr Rose in this case.
© Hesketh Henry
Email: brenda.baines@heskethhenry.co.nz
Website: www.heskethhenry.co.nz