What is a Contracting Out Agreement?
Section 21 of the Property (Relationships) Act 1976 enables couples to contract out of the Act and enter into their own private agreement to determine the status, ownership and division of their property upon separation or death. This is called a Contracting Out Agreement. They can be made at any stage of the relationship although it is advisable to do so before the relationship has lasted three years.
Why do you need one?
Upon the unfortunate event of separation or death the Property (Relationships) Act 1976 divides all the relationship property equally unless the court considers there are extraordinary circumstances that will make equal sharing repugnant to justice. However, if a couple have a Contracting Out Agreement the Act will not apply, thus all their property will be divided upon their privately agreed terms. A Contracting Out Agreement is valuable for a number of reasons:
- A party bringing substantial assets into the relationship can keep those assets as separate property;
- Provisions can be made for children from previous relationships;
- Protects couples from each other’s debt;
- Defines the share of the relationship property that each party is entitled to upon separation or death;
- Can fit your individual circumstances;
- Provides certainty and security; and
- Avoids lengthy litigation.
Four key tips
- Take your time – Do not rush into it. A Contracting Out Agreement requires careful thought and detail. Make sure all your assets and liabilities are listed and that you have made provisions for the future. For example, Kiwisaver and superannuation funds.
- Make sure the agreement is valid – An agreement must be in writing and signed by both parties. Each party must receive independent legal advice before signing (a lawyer not associated with the other party). A lawyer must witness the signing and certify that prior to signing the agreement, the meaning and consequences of the agreement were explained to each party.
- Make sure the agreement is fair – The court can set aside an agreement if to give effect to the agreement would cause serious injustice. If an agreement is extremely one-sided the more likely it will be successfully challenged in court.
- Update the agreement regularly – It will not last forever. A Contracting Out Agreement is very much like a will and needs updating when circumstances change, for example, when children are born or new assets are accumulated.
A Contracting Out Agreement is not for everyone – many people are happy to divide their property equally in the event of separation or death. However, a Contracting Out Agreement is useful for couples bringing significant assets into the relationship that they want to remain separate property or for providing for children from previous relationships. The four tips will ensure you have a secure agreement that will provide certainty for the future.
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