The Property (Relationships) Act 1976 (“PRA”) operates as a code. That means that once a relationship qualifies under the Act then the Act will apply in place of other rules and agreements which may have been made. An exception to this rule is section 21 agreements which allow parties (spouses or partners) to contract out of the PRA and make their own arrangements with respect to the “status, ownership and division” of their property. These agreements come in two forms. Compromise agreements made after separation (s 21A) and contracting out agreements which can be made at any time before or during the relationship (s 21). Certain requirements must be met for an agreement to be valid under the Act and traditionally the Courts will interpret these agreements strictly.
Form, content and requirements
Section 21 agreements have wide applicability and can do any of the following (s 21D)
- provide that any property, or any class of property, is to be relationship property or is to be separate property.
- define the share of the relationship property, or of any part of the relationship property, that each party is to be entitled to when the relationship ends.
- define the share of the relationship property, or of any part of the relationship property, that the surviving party and the estate of the deceased party are to be entitled to on the death of 1 of the parties.
- provide for the calculation of those shares.
- prescribe the method by which the relationship property, or any part of the relationship property, is to be divided.
- An agreement will not be valid unless it complies with the following requirements (s 21F)
- The agreement must be in writing and signed by both parties.
- Each party to the agreement must have independent legal advice before signing the agreement.
- The signature of each party to the agreement must be witnessed by a lawyer.
- The lawyer who witnesses the signature of a party must certify that, before that party signed the agreement, the lawyer explained to that party the effect and implications of the agreement.
Where an agreement does not comply with the above requirements the Court has the discretion to declare the agreement has effect if it is satisfied that the non-compliance has not materially prejudiced the interests of any party to the relationship (s 21H). The Courts have consistently held that the failure to get independent legal advice prior to signing an agreement will generally be fatal to the agreement being valid under the Act.
Setting aside an agreement
The Court can set aside an agreement if it is satisfied that giving effect to the agreement would cause “serious injustice” (s 21J). In deciding whether to give effect to an agreement 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.
There is no definition of “serious injustice” in the Act but the Courts have determined that serious injustice is a broad discretion which must be exercised in light of the policy underlying the legislation. A mere disparity of outcome at the time of separation is not enough to constitute a “serious injustice”. Section 21 agreements usually occur in circumstances where one party has the assets and is pushing for an agreement, and may involve an issue of whether the relationship will continue in the absence of an agreement. Accordingly, the presence of such circumstances is not generally relevant to the issue of “serious injustice”. It can be a difficult threshold to meet.
Interpretation of agreements
Because of the strict applicability of the PRA as a code and the importance of equal division in New Zealand the Courts will take a strict approach to interpreting s 21 agreements and their effect on the rights and obligations under the Act. A recent High Court case, Mead v Graham-Mead, is a good demonstration of the Court’s approach to interpretation of s 21 agreements. In Mead the parties were in a de facto relationship for some years. At the beginning of the relationship they had entered into a s 21 agreement in which they identified and listed specific property which was to remain each party’s separate property. The relevant provision of the agreement was as follows “The parties agree pursuant to s 21 of the [Act] as follows:
- The property in Schedule A shall be for all purposes the separate property of the intended husband.
- The property in Schedule B shall be for all purposes the separate property of the intended wife.”
Included in Schedule A was farm land which included a homestead where the parties lived in with their children. A homestead is defined in s 2 as being a family home situated on an un-subdivided part of land that is not used wholly or principally for the purposes of the household. The classic example of this is a farm.
The Court raised the issue of whether the agreement could be properly interpreted to exclude a homestead claim under s 12 of the Act. Section 12 applies where the family home is a homestead. That section provides that the normal rules of division of the family home do not apply and instead each party is entitled to share equally in a sum of money equal to the equity in the homestead.
The Court summarised that because the parties had made their home on land which was separate property, the effect of s 12 was that they each were entitled to share equally in a sum of money equal to the equity, unless on its proper construction the s 21 agreement excluded the operation of s 12.
The Court recognised the exclusion of s 12 would have be a fundamental departure from an important principle underlying the Act, namely that the partners should have an equal financial stake in the family home. Clear words would be necessary to exclude the monetary award provided for in s 12. The plain words of the agreement did not exclude such a claim. Mead demonstrates that clear unambiguous words are required in the drafting of s 21 agreements.
Section 21 agreements provide an alternative to division under the Act and are an effective way for parties to safeguard their separate property. They are particularly useful for parties wanting to protect significant assets acquired prior to the relationship or to provide financial security for children from a previous relationship. However, careful consideration must be taken before entering into one of these agreements as it will be difficult to get around an agreement where an agreement which has been drafted carefully and meets the requirements. The Court will not lightly overturn a properly executed s 21 agreement.
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