For Richer, Poorer – Contracting Out Of The Property (Relationships) Act 1976

The Property (Relationships) Act 1976 (the ‘Act’) applies to all domestic relationships, including marriages, de facto relationships and same sex relationships.

The defining feature of the Act is that it provides for the equal sharing of the assets and liabilities of the relationship, irrespective of the differing financial contributions of either partner throughout the relationship. In many cases this includes situations where one party may have brought significantly more assets into the relationship than the other.

The equal sharing provisions of the Act apply to all relationships exceeding three years duration.

Parties may enter into an agreement to contract out of the equal sharing provisions of the Act(‘Contracting Out Agreement‘). In order for a Contracting Out Agreement to be enforceable, it must be in writing and both parties must obtain legal advice independently of each other before signing the Contracting Out Agreement.  The lawyer providing the advice must also sign the Contracting Out Agreement, certifying that they have explained the nature and effect of it.

Contracting out of the Act becomes especially important when there is a disparity in the financial positions of the partners. This disparity in the financial positions of the partners arises where one of them brings greater net assets into the relationship than the other.

In the absence of a properly signed Contracting Out Agreement the equal sharing provisions of the Act will apply. In the event that the partners separate without entering into a Contracting Out Agreement the effect can be a net transfer of assets from the wealthier partner to the less well off partner.

This can be particularly upsetting for the wealthier partner if that separation occurs close to retirement age, where there is limited opportunity to recover financially.

The impact of the equal sharing provisions on the wealthier partner are magnified if that person has the misfortune of experiencing two or more separations without protecting their interests by entering into a Contracting Out Agreement. This can have the effect of halving that person’s net worth each time they separate from a three year relationship.

Inheritances and gifts are generally considered to be the separate property of the partner to whom the gift or inheritance was given. However, when for example this gift or inheritance is applied to repay the loan for the family home and the partners go on to separate, the non inheriting partner is entitled to benefit from half of the inheritance applied to reduce the borrowing for the family.

It is often assumed that assets in a family trust are protected from a potential relationship property claim, but this is not necessarily the case.  In circumstances where the family trust was settled during the course of the relationship or where relationship property has been applied to sustain trust assets, the family trust can become tainted as relationship property. This most commonly occurs when the income of one or both partners is used to meet the loan obligations for property owned by the family trust.

A Contracting Out Agreement is fundamental for anyone in a relationship wishing to secure their assets, especially a partner entering into a second or subsequent relationship.