Time for a contracting out agreement?
You have had years of saving up for the overseas experience many New Zealanders dream of — then a pandemic hits. The London job you thought you had in the bag is no longer an option, and you and your partner are faced with extending the lease on your flat here — that you were eagerly awaiting to escape. What do you do now?
In 2020, many couples have found themselves cashing out what would have been their big OE savings stash and using it for a house deposit. Others have leapt at the banks’ lower interest rates to extend their borrowing and have bought properties that were unattainable only a year ago. All over the country, and particularly in Auckland, the property market is flooded with returning expats who are establishing roots back here — often earlier than anticipated.
We have seen an exponential uptake of investment in property, among young couples in particular. Part and parcel of getting a deposit together is that, quite often, many couples’ initial cash contributions to fund the deposit are different. This may not be an issue at the time of purchase, but if you and your partner or spouse break up, this difference could become a major sticking point.
Get a contracting out agreement
In order to protect your contribution to your property purchase, you should enter into a contracting out agreement (more commonly referred to as ‘a pre-nup’ or ‘pre-nuptial’, even if you are not married).
Through this agreement, couples can stipulate their own rules for the classification and division of their assets in case they separate or one of them dies. Without a binding contracting out agreement, the Property (Relationships) Act 1976 (PRA) will determine how your assets are split if you separate. Under this legislation, the home you live in as a couple is generally deemed to be ‘relationship property’ — meaning it is an asset that is likely to be divided equally between you both, even if one party contributed more towards the purchase.
A contracting out agreement can be entered into at any time. It is recommended, however, that couples enter into a contracting out agreement before they have been in a relationship for three years (which is generally when the equal sharing principles of the PRA apply).
How it works
Let’s look at the example of Emma and Tane. Emma has $10,000 of cash savings and a further $20,000 from her KiwiSaver that is available for withdrawal. Meanwhile, Tane has been in the workforce longer and has cash savings of $30,000, he has $55,000 in available KiwiSaver funds and Tane’s parents are gifting him $40,000 to assist in his first home purchase.
With $155,000 as a deposit, Emma is contributing $30,000 and Tane $125,000 to the purchase price of what will be their family home and relationship property. Without a contracting out agreement, if their relationship ends, the equity in the family home is likely to be divided 50:50.
In this situation, it is prudent for Emma and Tane to enter into a contracting out agreement to effectively ring-fence these initial contributions. An agreement could stipulate that, in the event the house is sold or Emma and Tane separate, Emma would receive $30,000, Tane would receive $125,000, any mortgage and costs of sale are repaid in full, and the balance is split equally between Emma and Tane. A mechanism such as this protects initial contributions from Emma and Tane, while acknowledging their contributions to their home through equally sharing in any equity increase.
Although there are other options for Emma and Tane — such as owning their home in unequal shares to acknowledge their unequal initial contributions — a contracting out agreement is still needed to establish the unique rules for Emma and Tane’s relationship property. Without an agreement, if Tane and Emma separate after three or more years to-gether, the PRA would apply and the proceeds of the sale of the family home are likely to be shared equally, which Tane may consider to be unfair.
Couples should be aware that it is not just their home that comes under the rules of the PRA. Incomes, KiwiSaver, company shares, chattels and most assets acquired during the relationship also come into play under the legislation. A contracting out agreement can dic-tate and pre-empt how all assets will be classified and divided.
When you may not need an agreement
If a couple contributes relatively similar amounts to the purchase of their property — all those OE travel savings have added up to similar-sized piggy banks — a contracting out agreement is perhaps not necessary.
Buying your first home is an exciting chapter for any couple. If 2020 has taught us anything, however, it is to expect the unexpected. It may feel inconceivable that you and your partner may separate, but none of us know what the future may hold. Should your relationship go pear-shaped, your contracting out agreement may become your greatest friend to guide your separation and set up your new life.
If you would like to know more about a contracting out agreement and how it relates to your particular situation, please don't hesitate to contact a member of our relationship property team here.
DISCLAIMER: All the information published in Fineprint is true and accurate to the best of the authors’ knowledge. It should not be a substitute for legal advice. No liability is assumed by the authors or publisher for losses suffered by any person or organisation relying directly or indirectly on this newsletter. Views expressed are those of individual authors, and do not necessarily reflect the view of this firm. Articles appearing in Fineprint may be reproduced with prior approval from the editor and credit given to the source. Copyright, NZ LAW Limited, 2020. Editor: Adrienne Olsen. E-mail: email@example.com. Ph: 029 286 3650.