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Why You NEED To Review Your Contracting Out Agreement
6 November, 2017 | Smith and Partners
Article updated April 2024
Contracting Out Agreements, otherwise known by their widespread American connotation as “pre-nups”, are increasingly popular and are becoming a necessity for parties when entering into a relationship. But too many couples are using a set-it-and-forget-it approach. A correctly executed Contracting Out Agreement can be legally binding – but holes can start to appear if the Contracting Out Agreement is not reviewed regularly.
Why are they so popular?
The Property Relationships Act 1976 (‘the Act”) dictates that most assets/liabilities in a relationship are to be divided 50/50 if that couple were to separate.
Unfortunately it is no longer the norm for couples to be together forever. With people having multiple partners over their life span, the idea of sharing all your assets with a few different people can be concerning (remember that house you owned outright?).
Cue the Contracting Out Agreement…
A Contracting Out Agreement defines how to allocate assets/liabilities in the event of separation or death. Effectively, couples can come to any arrangement they like rather than the standard 50/50 split. (You can keep your house separate, while ensuring you don’t take on your partners GE Finance debt).
The need for a “fair” agreement
Now, you may think that’s all you need to do. However, the Court can set aside a Contracting Out Agreement (upon the application of one of the parties) if, having regard to all the circumstances, it is satisfied that giving effect to the Agreement would cause serious injustice. The Court must have regard to:
- the provisions of the agreement;
- the length of time since the agreement was made;
- whether the agreement was unfair or unreasonable in the light of all the circumstances at the time it was made;
- whether the agreement has become unfair or unreasonable in the light of any changes in circumstances since it was made (whether or not those changes were foreseen by the parties);
- the fact that the parties wished to achieve certainty as to the status, ownership, and division of property by entering into the agreement;
- any other matters that the court considers relevant.
When drafting your Contracting Out Agreement, we work hard to minimise the possibility of the Agreement being overturned down the track. This is why it is important to clearly set out all the circumstances that have been taken into account when determining how property is owned under the Contracting Out Agreement, and why the parties consider the arrangement is fair in their particular circumstances.
Regular reviews help ensure the agreement stays “fair”
Once you have entered into the Contracting Out Agreement, you must treat it as a live document. You need to review it regularly i.e. every few years or upon a significant change in circumstances eg. having a child, serious illness, periods of unemployment, marriage etc. Sometimes this may include building mechanisms into the original Contracting Out Agreement for property rights to change upon important events occurring.
If a Contracting Out Agreement is not regularly reviewed and updated, it becomes vulnerable to challenges. This is especially so when the Contracting Out Agreement is more in favour of one party than the other.
For example: if a couple were together for twenty years and upon separation their Contracting Out Agreement stipulated one partner was to receive a car while the other was to receive the family home, it could potentially be overturned if it were deemed to be seriously unjust. However, if the Contracting Out Agreement has been continuously reviewed, the reasons for the arrangements clearly set out, and the parties were happy with this arrangement at each review, the Contracting Out Agreement is more likely to stand.
As a relationship continues to grow and change, the agreement which governs relationship property must adapt to those changing circumstances.
