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How to enter into a property agreement

Introduction

The property rights of both married and de facto couples (including same-sex couples) who have lived together for three years have been governed by the same equal-sharing rules in the PROPERTY (RELATIONSHIPS) ACT. In April 2005 civil unions were established as a legally recognised form of relationship, and civil union couples who break up are now treated the same as married couples under the Property (Relationships) Act.

These couples have the option of either making their own property agreement (referred to as "contracting out" of the Act), in which case their property will be divided in ways that they specify in the agreement, or to not make any agreement of their own, in which case they will automatically be covered by the equal-sharing rules in the Act.

A couple who decides to contract out of the Act will need to follow some special procedural rules (including each person getting independent legal advice) in order for the agreement to be valid.

Married, de facto and civil union couples who have lived together for less than three years are usually not covered by the equal-sharing rules. They too may wish to make their own property agreements to avoid uncertainty. See below,"Marriages, civil unions and de facto relationships of less than three years (`short duration')".


If you wish to prepare your own Property Agreement this Cohabitation (living together) agreement can be used. It's intended to minimise the legal expenses of people who wish to contract out of the Act.

Legal spouses or partners may "contract out" of the equal-sharing rules

The PROPERTY (RELATIONSHIPS) ACT says that a married, de facto or civil union couple, or any two people who are contemplating entering into a marriage, civil union or de facto relationship, may contract out of the Act by entering into their own agreement to determine the status and ownership of their property and how it should be divided. If they do this, the Act will not apply to them. Thus, an agreement might be made either before the marriage, civil union or de facto relationship begins, or during it, or as a way of reaching a settlement if their relationship has broken down.

The agreement can be expressed to apply while both parties are alive, or when one of them dies, or in both situations.

Property agreements entered into before a marriage have often been called "pre-nuptial" agreements. They have typically been entered into where one person brings to the marriage substantially more property than the other, and that person wishes to protect this property from a claim by the other party should they separate.

An "opt-out" system

This system works on an "opt out" basis. If a couple do nothing – that is, if they make no agreement – they will be covered by the equal-sharing rules. If they wish to avoid some or all of those rules they must actively "opt out" by making their own agreement.

What should we include in the agreement?

Your agreement should include the following terms and information:

  • what property is intended to be owned together, and in what shares (equal or some other proportion)
  • what property is to remain the separate property of each party
  • whether or not any property should no longer be classed as separate property because it has been or will be used jointly
  • who owns any gifts made by one party to the other, or any gifts from third parties

What are the special procedural requirements?

The special requirements that must be met for a "contracting out" agreement to be valid are as follows:

  • The agreement must be in writing.
  • It must be signed by both parties.
  • Each of you must have received independent legal advice.
  • Each party's signature must be witnessed by a solicitor, who must certify that the effect and implications of the agreement were explained to the signing party.

What if the special requirements are not met?

If these special requirements are not met, the agreement is invalid. Your situation will therefore be covered by the provisions of the Act (see How property is divided when a marriage, civil union or de facto relationship ends).

However, the court can validate an agreement that doesn't comply with the special requirements, if the failure to comply has not materially prejudiced either party's interests.

Court's power to cancel an agreement if "serious injustice"

The court may rule that your agreement is invalid if the court believes that it would cause "serious injustice", even if the agreement complies with the special requirements.

"Serious injustice" is a higher threshold than that which applied to contracting-out agreements by married couples under the old law before 1 August 2001 (de facto couples weren't covered by the equal-sharing rules under the old laws, and so the issue of "contracting out" did not arise for them). Previously, the court could invalidate the agreement only if it would be "unjust" to give effect to it. This change means that the courts are now less likely to overturn agreements.

In deciding whether the agreement would cause serious injustice, the court considers:

  • the provisions of the agreement
  • how much time has passed since the agreement was entered into
  • whether the agreement was unfair or unreasonable when it was entered into
  • whether the agreement has become unfair or unreasonable in the light of changed circumstances since it was entered into
  • any other relevant matters

De facto couples contracting out of the Act before February 2002

De facto couples who made "contracting out" agreements before 1 February 2002, in anticipation of the Act coming into force on that date, had to follow the special procedural requirements if they made their agreement on or after 1 August 2001. Otherwise the agreement they made is invalid.

A contracting out agreement made by a de facto couple before 1 August 2001 is valid whether or not it followed the special requirements, assuming the agreement is valid under the ordinary rules of contract law. This means, for example, that the agreement does not have to be in writing for it to be valid.

How were married couples affected by the new laws introduced in February 2002?

The position of married couples wishing to contract out of the equal-sharing rules remained substantially the same after February 2002. Whether they made an agreement before or after 1 August 2001, the special requirements for contracting out apply to them.

But after 1 August 2001 a contracting-out agreement made by a married couple is subject to the higher "serious injustice" threshold, even if the agreement was made before 1 August 2001 under the old MATRIMONIAL PROPERTY ACT.

Marriages, civil unions and relationships of less than three years ("short duration")

The equal-sharing rules in the PROPERTY (RELATIONSHIPS) ACT 1976 usually apply to your marriage, civil union or de facto relationship only if you lived together for at least three years. A marriage, civil union or de facto relationship of less than three years is called a "relationship of short duration".

  • In the case of marriages or civil unions of short duration, special rules apply to decide how the property is divided. Instead of there simply being equal shares, the property is divided according to the contributions the parties made to the relationship.
  • In the case of de facto relationships of short duration, the Act doesn't apply at all (unless there are special circumstances, such as there being a child).

If you are in either of these situations you may wish to enter into your own property agreement to determine how your property is to be divided and to avoid the uncertainty of a property dispute. An agreement can make a property settlement happen quickly and efficiently, avoiding both considerable emotional stress and the legal costs involved with court proceedings.

Your agreement will not have to meet the special procedural rules that apply to "contracting out" agreements.

Sunset clauses

Property agreements sometimes contain a "sunset clause". This is a clause that provides that the agreement will automatically become null and void after a specified length of time.

Cautionary notes
  • It is vital that you obtain independent legal advice before signing any agreement contracting out of the equal-sharing rules, otherwise the agreement will not be binding.
  • It is also important that you obtain legal advice to ensure that the agreement cannot later be challenged in court under ordinary principles of contract law.
  • A couple might enter into a property agreement before acquiring any substantial asset or property together. This is a sensible measure as it provides clear guidelines as to what will happen should the marriage, civil union or de facto relationship end.


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