Major changes proposed to the way property is divided on separation
The Law Commission is currently undertaking a review of the Property (Relationships) Act 1976 (PRA) to assess whether the existing rules achieve a fair outcome at the end of a relationship.
The Commission recently published a report which highlights their concerns with the current PRA and sets out a number of proposed changes which, if enacted, will constitute a major change in the way property is divided at the end of a relationship. The Commission have also suggested changes to the way spousal maintenance and economic disparity are dealt with on separation.
Any legislative changes are at least a couple of years away, but the Commission's report provides an interesting insight into where the law is heading. We touch on a few of the more significant proposed changes below.
Division of the Family Home
The family home currently has special status under the PRA, which generally results in the home being classified as 'relationship property' and shared equally on separation, regardless of when or how it was acquired. In its report, the Commission argues that this rule results in unjust outcomes in a number of situations, particularly in circumstances where the home was owned by one partner before the relationship began.
The Commission has proposed that when the family home was owned by one party before the relationship, or was received as a gift or inheritance, the home will not be divided equally at the end of the relationship. Instead, the Commission has suggested that the non-owning party will only be entitled to a half-share of the increase in value of the home that occurred over the course of the relationship. If the family home was acquired after the relationship began, the usual equal sharing rules will apply.
Family Income Sharing Arrangement
In the Commission's view, the PRA fails to achieve a fair outcome in situations where one party is financially advantaged or disadvantaged at the end of a relationship as a result of circumstances arising within the relationship. This is termed as "economic disparity" in the PRA. This economic disparity usually occurs when a couple have structured their relationship in such a way that one party has focused on their career, while the other has taken time away from work to raise children and maintain the home.
Currently, the disadvantaged partner has two options; the first is to bring a claim for compensation for economic disparity under section 15 of the PRA but these applications can be costly and time consuming. The second option is a spousal maintenance claim, but spousal maintenance is designed to meet a partner's reasonable needs, not share the economic advantages and disadvantages arising from the relationship. In our experience, an economic disparity claim and spousal maintenance claim are brought together.
The Commission has proposed that the two current options are replaced with a new concept called a Family Income Sharing Arrangement (FISA), which would be used to equalise the parties' income for a period of time following separation. The period of time that this would be in place is suggested to be approximately half the length of the relationship, up to a maximum of 5 years from the date of separation.
A FISA would be used in a situation where the parties had a child together, or their relationship was longer than 10 years in duration, or in a situation where one party's career was enhanced or disadvantaged by the relationship. It's not yet clear how a FISA would work practically, or whether the arrangement could be paid as a lump sum from relationship property, but we anticipate the legislation will still allow for parties to achieve a clean break financially if that is what they agree to do.
Trusts create a significant issue for the application of the PRA because the PRA only applies to property owned by the partners. When property is held in trust, the legal owners of that property are the trustees. As such, trust property is generally outside the scope of the PRA and those disadvantaged by a trust structure are left with bringing claims against trusts outside the ambit of the PRA. This is a significant problem given that there are estimated to be between 300,000 - 500,000 trusts in New Zealand and approximately 15% of homes are owned by a family trust.
The Commission proposes to address this issue by allowing the Family Court to grant relief when trust property has been produced, preserved or enhanced by the relationship. If the court is satisfied that one of the requirements is met, it will have broad powers to order that the trustees distribute capital from the trust, vary the terms of the trust, or resettle some or all of the trust property.
It is widely accepted that the PRA needs to be amended in order to keep pace with New Zealander's expectations about what should happen to their property in the event of separation. The inclusion of greater powers to deal with trust property is clearly a practical step to address the prevalence of family trusts and will likely be welcomed by relationship property lawyers, but perhaps disparaged by trust lawyers. Additionally, the proposed FISAs have the potential to provide partners with better certainty about their financial wellbeing post-separation. The proposed changes to the family home may prove controversial. Our own experience suggests that the majority of parties wishing to contract out of the PRA do so primarily motivated by a desire to keep their interest in the home they owned prior to the relationship separate. As such, it will be interesting to see Parliament and the public's reaction to this proposed change.
To read the full list of suggested proposals, you can view the report here.
For assistance with relationship property matters, contact our team of experienced relationship property specialists.