Contracting out agreements (pre-nups) – do we need one?

Relationship property

When you’re considering entering into a long-term commitment it makes sense to consider at the start how you would like the assets you both bring to the partnership to be distributed should the relationship end.

While most people have heard the term pre-nup, often used in stories about celebrities about to marry, it has unfortunately created some confusion in relation to our laws around relationship property divisions.

In New Zealand we have what is called a Contracting Out Agreement. The couple who sign it agree to ‘contract out’ of the Property (Relationships) Act 1976 (the PRA). You don’t have to be getting married to enter into a Contracting Out Agreement. In fact, the provisions of the PRA, and therefore contracting out agreements, apply to marriages, de facto relationships and civil unions, including same-sex relationships.

If you don’t have a Contracting Out Agreement, the PRA provides that certain property will be classified as relationship property after three years in a relationship (or earlier in some circumstances), and subject to an equal division in the event of the relationship ending.

The property classified as relationship property is quite extensive. It includes the family home, family chattels, furniture, motor vehicles used for family purposes, and income (and assets or investments the income is used for, including KiwiSaver).

Relationship property can, in some circumstances, also include property that one person owned before the start of the relationship, such as a holiday home used by the couple. It can also extend, in some cases, to inheritances; for example, if one person uses his/her inheritance to reduce/pay off the mortgage on the family home, or to buy a boat or new vehicle. Often people wrongly assume that since his/her inheritance paid for it, it belongs to him/her. They are often surprised to be advised that property they thought to be their own, has become relationship property and subject to an equal division.

A Contracting Out Agreement, as the name suggests, contracts out of the provisions of the PRA. One of the main purposes of a Contracting Out Agreement, is to allow a couple to decide what property should be shared between them, and what property should remain separate. This can be particularly useful where they each bring substantially unequal contributions to a relationship, where one person is receiving significant inheritances or gifts, or where they have a child or children from a previous relationship, as they may want to leave certain property as an inheritance. If any of these situations apply to you, then unless you are happy for there to be an equal division of relationship property, you should seek legal advice about entering into a Contracting Out Agreement.