Proposals to change the way income and property are split in divorce cases aim to put children’s interests first. But some fear kids will become pawns in a legal and financial stalemate. Donna Chisholm reports.

‍Clean break. They’re two words you won’t find in the laws governing the division of property after relationships end, yet, for more than 40 years, the idea that couples should move on and start afresh as soon as practicable after a split has been a cornerstone of judicial decisions and legal advice.

Now, however, that looks set to change, with the Law Commission releasing its preferred approach to a revamp of the Property (Relationships) Act 1976. It wants the best interests of children to become a primary consideration in property division, saying that may involve delaying the sale of the family home to allow the primary caregiver – often the mother – to remain there with the children.

For women such as Linda (not her real name), whose 12-year relationship ended a few years ago, leaving her battling to keep her children in the home they’d grown up in, it’s a welcome change – even if it’s too late for her.

Her former partner wanted his money out of the property quickly so he could start anew, and their house was put up for sale two months after they separated.

“There was huge pressure to put it on the market and split the money. The prospect of renting somewhere that would be more expensive than an interest-only mortgage and having to move the kids was just awful, because it comes right off the back of such a brutal change in the make-up of their family.

“My No 1 priority was to hang on to that house and stay in the property market as a single woman, but to have as little disruption to the lives of my children as possible.”

As it happened, the property didn’t attract a buyer, her partner accepted a lower price and she was able to buy him out, meaning she didn’t have to leave Auckland – which would have created huge logistical barriers to successful co-parenting. “There must be so many people who just say, ‘Well, I have to get out of Dodge now’ – home ownership in Auckland is a two-income thing.

”Another key proposal is to pool and share the parents’ incomes for up to five years after separation, with a Family Income Sharing Arrangement (Fisa) replacing maintenance and economic disparity payouts.

‍A big u-turn

‍Some lawyers say the ideas represent a fundamental shift from the clean-break principle and risk children being used as pawns for financial gain in any property settlement. Indeed, the New Zealand Law Society argued against the proposal to place more weight on the interests of children, saying they already received “adequate attention”.

“The clean-break principle is understood and it seemed to work as well as anything can,” says Kirsty Swadling, chair of the society’s family law section. “This is quite a U-turn on clean break.”

Although she says there are many positives in the commission’s review, she’s worried that, if some proposals become law, it will lead to fights over the care of children that wouldn’t otherwise happen.

“It’s fine to have children’s rights, needs and best interests emphasised in property matters, but as soon as some parents see having the children as a ticket to potentially staying in the home, there is the risk there will be the wrong motivations in agreements about the care of children.”

That already happens to an extent, when some parents consider their child support obligations when calculating how many hours a week they should spend looking after their children.

“If you are saying, effectively, that the needs of the children to stay in the family home with an occupation order have primacy, it’s difficult to see how to stop parents looking at children and their care arrangements in the light of the property rules,” Swadling says. “It’s just human nature.”

‍Escaping responsibility

‍But Children’s Commissioner Judge Andrew Becroft says the clean-break policy, which was developed by the courts rather than Parliament, is “wholly inappropriate” when children are involved and should be “consigned to history”.

He says the assumption that responsible adults can be trusted to make the best decisions for their children when separating – and the state should stay out – is “patently flawed”.

“Separation is one of the most emotional and turbulent times adults go through and they are the least equipped to make good decisions for others, especially children,” Becroft says.

“Generally, it’s been too easy for the non-caregiving parent, particularly the man, to walk away and start again without sufficiently being held responsible for the children who have already been brought into the world.”

The commission’s recommendation to make children’s interests the primary consideration in relationship property splits is required by the United Nations Convention on the Rights of the Child, to which New Zealand is a signatory, but Becroft wants the law to go even further – making children’s interests paramount.

“If the Law Society is saying that, because of possible unintended consequences, we shouldn’t change the law, I flat out disagree.”

In one case that came to the attention of his office in May, a woman with three children under 10 was told to move out of the family home because the occupation rent for the property was prohibitively expensive.

“You’d at least think if the man is walking out, that a mother of three kids could have the security of staying in the house until the end of the school year. And that doesn’t happen enough in my view.

“I’m concerned that, too often, the answer is ‘move out, separate now, bang’ – and the mother and child often go to much poorer accommodation in much poorer areas and it’s very easy, for particularly the non-custodial parent, to start up a new relationship, sometimes with new children, very quickly.”

Auckland family lawyer Lynda Kearns says children’s interests have been “completely overlooked”.

“I think clean break has been over-emphasised and it just isn’t fair in some cases,” Kearns says.

“One of the worst things that can happen to you as a kid is that your parents split and you lose your home and you have to go into a rental, with all the uncertainty and upheaval that causes. I agree we have ignored the interests of children so I welcome the change in emphasis.”

‍House price effect

‍She believes the heated property market has been influential in the commission’s proposals.

“In Auckland now, if parties separate and they divide a house worth $1 million 50-50, one or both are never going to be able to buy a house – I think that’s behind this.

“A clean break has been okay in a rising market, because equity has gone through the roof and people tend to recover, but now the market is softening.”

Occupancy orders and the postponement of “vesting” – the decision on who gets to keep the home and who will be paid out – have been underused, she says, because there has been such an emphasis on a clean break. The new proposals will provide greater direction for private settlements between couples who might otherwise hire a lawyer.

At present, someone who wants to stay in the family home usually has to take over the mortgage as well as paying out the other partner’s equity. “That’s extremely difficult, especially in places like Auckland, where people have large mortgages and limited equity. The whole point is to give a breathing space so you don’t immediately have to pay out your share of the equity.”

One mother of three Kearns represented, a teacher, reached a private settlement that delayed the payment of equity and enabled her to stay in the home and pay the mortgage. “She would have lost her house and been destitute without her husband agreeing to defer getting his share.”

“Being able to stay in the house lifted a huge weight off me,” the teacher told the Listener.

“I was constantly worrying about where we might end up or how I would be able to afford a place on my modest income, given I had spent many years as a full-time mum.

“Staying in the family home has allowed me to focus on my children and their well-being, and allows them to focus on their schooling and their friends – as they should be doing at their age.”

Kearns concedes many lower-income earners may find the proposals academic because they simply can’t afford to leave their equity in the family home and pay for other accommodation elsewhere. She says any law changes will need extensive public education.

“Every time someone goes to their lawyer when they buy a house, the lawyer should be telling them about these things.”

‍Never a “clean break”

‍Law commissioner Helen McQueen, who led the review, says the term “clean break” is used too casually – and perhaps too readily as an excuse for parents to move on to new relationships.

“I have a bee in my bonnet about that,” she says. “Why are the children from a first relationship just to be abandoned in light of a new relationship? Why do we think that’s okay?

“Clean break is a lovely idea, and obviously partners who separate are doing so because they don’t want to be together any more – and we can all understand that. But it has been used for years without addressing what it really means.

“What we hope to do in the final report is to say a clean break is fine, but not when it causes unfairness to partners or children. Parents never get a clean break, because they are parents for the rest of their lives.”

McQueen says the Law Commission was persuaded by an “incredibly powerful” submission from children’s charity Barnardos NZ about the impact of parental separation on children and the ability of orders under the Property (Relationships) Act to make a difference in their lives after their parents split. In arguing for children’s interests to be a primary consideration, Barnardos said the main caregiver was often financially disadvantaged in 50-50 splits because of extra costs involved in raising children that weren’t recognised in child support payments.

‍Women fare worst

‍The commission also referred to the PhD thesis of social policy researcher Michael Fletcher, now at Victoria University of Wellington, which investigated the economic consequences of separation. Fletcher found separation substantially increased poverty rates and the negative effects persisted for at least three years.

Fletcher told the Listener that the commission’s proposals could reduce poverty and financial hardship post-separation, saying “clean breaks are not clean breaks at all. The outcome is often very dirty.”

His research showed the extent of inequality following separation, that usually, but not always, favoured men. On average, the men in his sample were about 15% better off and the women were about 29% worse off. “I completely agree that our child support system fails miserably and something needs to be done.”

Fletcher says the formula used doesn’t take into account many of the costs associated with child raising, other than food and clothing, and the opportunity costs of either giving up or reducing working hours to look after children, or paying childcare.But he is concerned about practical aspects of the income-pooling proposal, Fisa. “It creates a very odd incentive in that it encourages [the partner who would get the increased support] not to earn income. You could withdraw from the labour market and still get 50% of your partner’s income.”

University of Canterbury associate professor of law John Caldwell says although the current law requires courts to take children’s interests into account, they’ve been largely ignored.

“I’m sure all practitioners will acknowledge that. Probably supporting the clean-break principle, courts have said, ‘Well, this is essentially a property dispute between two adults; we are simply dealing with property rights’, and the children barely get a look-in in the way cases are currently run.” Occupation orders, for example, rarely featured.

In a paper earlier this year, Caldwell argued that maintenance awards should become “even more exceptional than they currently are”. In “Maintenance – time for a clean break?”, he wrote that most women would no longer regard marriage as “an anchor for their economic security”.

“Women in a relationship need to continue working; men need to do more childcare.”

Caldwell told the Listener that if a partner is compensated for what they’ve given up to support the relationship, “I can’t see the argument for maintenance once compensation has been given”. Although income-sharing would likely involve periodic ongoing payments, it could also be paid out in a lump sum if one party had the money to do so.

Another proposal is to treat property acquired by one partner before the relationship began, or inherited during it, as separate and not to be divided equally. The other partner would be entitled to only half the increase in value of the property during the relationship.

The commission acknowledges its approach results from changes in society – and house prices. More people are entering new relationships later in life, and are more likely to already own some property. But, conversely, rates of home ownership are also declining and, if that continues, fewer couples will have a family home to divide on separation, perhaps making the automatic equal sharing of the family home more of an anomaly.

Increasing house prices also mean the Property (Relationships) Act requires the division of an increasingly valuable asset, and family homes are often paid for by contributions from relatives in the form of loans, gifts or inheritances.

As with many of the proposals, lawyers are already thinking of “what-if” scenarios that may confound efforts to bring greater fairness. What if the partner has a lump of shares they owned separately before the relationship that are of equal value to a family home and they increase in value? The other partner doesn’t get a share in that case, so is that fair? “There’s definitely some good fresh thinking in the proposals,” says the Law Society’s Swadling, “but there’s fine tuning to see how it will be implemented.”

The commission’s position was informed by the Borrin Survey (research funded by the Borrin Foundation and conducted by University of Otago law researchers) of New Zealanders’ attitudes to equal sharing of relationship property. The survey found although 74% agreed with the current law, 88% thought it was appropriate to depart from it in certain situations – including if one partner owned the property separately before the relationship.

‍Prenups encouraged

‍So called “prenups” – agreements that allow parties to opt out of the legislation and set their own terms in case of a split – remain unchanged. Lawyers told the Listener the agreements should become “the norm”.

“People still feel a little uncomfortable about having to sign a prenup,” says senior family lawyer Antonia Fisher QC. She says although they are “almost the norm” now for second relationships, there’s still an awkwardness about them that’s resulted in many women in particular losing half of their home after three or four years in their new relationship.

Family law expert and professor of law Mark Henaghan – formerly of Otago but at the University of Auckland from mid-December – says he’d prefer to see the income-sharing provisions framed as a last resort rather than an option.

“My advice would always be to take the capital now if you can and get on with your life. Fisa fills a gap for those who don’t have a lot of assets, but the first choice should be getting a greater share of the home or capitalising other assets for a lump sum. It may be less in the long term but at least you get it up front. Waiting five years can be too long.”

He’s worried people will “play tricks” to hide their true income and sabotage the Fisa provisions.

“The wealthier people are, the harder it is to pin down their income. In the old days, we used to rely on maintenance … but we gave that up because you are constantly going back to court to get it enforced.”

The unaffordable cost of housing today meant many people would be unable to leave their equity in the home long enough to make occupancy orders more than a very temporary solution.

He says the commission has done a “magnificent job” in reviewing the legislation, but a single law cannot solve all of society’s ills in the fallout of breakups.

“We need other supports as well, to get people into houses they can afford and increase benefits, which are much too low.

“Separation has always been an economic kick in the guts for people, particularly those who have got out of the workforce and have to start from scratch again. And, unless we put other supports in place, it always will be.”

‍Rethinking trusts

‍With anywhere between 300,000 and 500,000 trusts in New Zealand – one of the highest rates per head in the world – it’s common for family homes to be owned by trusts, and for this to frustrate property division after separation. The 2013 Census reported nearly 15% of households had homes held in a trust, and, in general, they don’t legally qualify as relationship property because they’re owned by the trust, not the individuals.

The Law Commission says many couples divide trust property when they separate as if the trust doesn’t exist – what it calls a pragmatic but undesirable solution. “People should not be able to take advantage of the legitimate benefits of a trust structure, but then ignore [it] when it becomes inconvenient.”

It says people often settle trusts without understanding the implications under the Property (Relationships) Act. The current law allows a partner to access trust property if it’s been disposed of into the trust to defeat the partner’s claim under the act, but the commission has proposed an amendment that will further loosen the hold of trusts. It would allow courts to order one partner to pay compensation to the other, order the trustees to distribute capital, vary the terms of the trust or resettle some, or all, of the property in a new trust if it holds property that was “produced, preserved or enhanced” by the relationship.

The commission says it wants to protect partners’ entitlements while at the same time preserving trusts. Some family lawyers told the Listener the proposals don’t go far enough, compared with, for example, Australian legislation that makes trust property more accessible in relationship splits.

Carrying the load

‍Economic disparity provisions in relationship property splits – to compensate a partner who has put their career on hold to look after the children, for example – have been a confusing failure.

Lawyers had hoped for clarification in the landmark case of Scott and Williams, who separated in June 2007 after a 26-year marriage, but a Supreme Court decision in December 2017 offered anything but. The couple had built up a substantial property portfolio, including two Remuera properties, three commercial properties in West Auckland, a beach house in Omaha, a half-share in a Fiji property and another in Auckland, and Williams’ interest in his legal practice. Scott, a former lawyer, sought economic disparity compensation for giving up her job after the birth of their second child in 1992 and later working only part-time.

The Family Court awarded Scott $850,000, but this was reduced to $280,000 in the High Court and then increased to $470,000 in the Court of Appeal. In the Supreme Court, all five judges issued separate judgments with diverse opinions on their interpretation of the law, although a majority of three ordered an increased award of $520,000. Family lawyers say this failed to offer any guidance for couples in similar situations. Now, the Law Commission has proposed that the economic disparity provisions in the Property (Relationships) Act be done away with, and replaced by the Future Income Sharing Arrangement (Fisa).

The commission has also suggested repealing and replacing the maintenance provisions of the Family Proceedings Act, which sit alongside the economic disparity laws – an overlap it said had been described as “baffling” and raising “perhaps the greatest question of uncertainty and confusion” since 2001 reforms to the maintenance regime.

Its replacement, Fisa, would be decided by a statutory formula that equalised the partners’ incomes for a period that was roughly half the length of the relationship, up to a maximum of five years.

‍Intolerable cruelty

‍Should the “no fault” principle still apply in cases of gross misconduct?

‍You’ve been married for 10 years and discover that your spouse has spent tens of thousands of dollars paying prostitutes or flying a lover to overseas holidays. Or, they’ve developed a raging methamphetamine or gambling habit that puts them into serious debt – or worse, jail. Where to, then, when it comes to dividing relationship property?

Courts have long taken a “no-fault” approach in relationship-property division, unless one partner’s bad behaviour reaches a very high threshold – the conduct must be “gross and palpable” and must also have significantly affected the extent or value of the relationship property.

In general, that’s still the thrust of the Law Commission’s preferred approach – but the new proposals do offer wronged spouses some wriggle room. The commission says the law should be amended to allow misconduct to be taken into account when the courts are assessing whether there are extraordinary circumstances that make equal sharing “repugnant to justice”.

Senior family lawyer Antonia Fisher QC says the no-fault system sets our divorce laws apart from most other countries and should be maintained. “We really want to do away with fault. Providing greater recognition for misconduct would incentivise partners to focus on fault and lay blame, which in turn would place an impossible burden on courts. The law would become less certain and less predictable.”

Fisher says it isn’t unusual for lawyers to see clients who have tracked their partners’ infidelity through mysterious references on credit card bills. “It’s a matter of adding up the spending, which needs to meet the threshold of ‘gross and palpable’ before it can be taken into account. In other words, the spending needs to be ‘really bad’. It is essential to differentiate between the conduct and the spending.”

When the spending does reach the required threshold, one partner can be forced to reimburse the money. But if a court rules there are extraordinary circumstances that mean equal sharing is repugnant to justice, it can tip the split to a 40-60 or 30-70 division.

Fisher says courts tend to be sympathetic when a drug, alcohol or gambling addiction eats into relationship property.

Another family lawyer, Jeremy Sutton, wants to see specific misconduct – imprisonment for sexual abuse or domestic violence – disqualifying partners from a 50-50 split, even if the conduct hasn’t reduced the amount of relationship property available. “Why should a very violent person get a 50% split? The no-fault rule needs a limit.

”He agrees there shouldn’t be “a general reaccounting” of the relationship after it’s ended, but says the existing provisions are already reluctantly applied, and widening the definition of misconduct would be useful.

‍This article was first published in the December 15, 2018 issue of the New Zealand Listener.