What is a “Contracting Out Agreement”?

Generally at the end of a qualifying marriage, civil union or de facto relationship, the Property (Relationships) Act states that all relationship property (including the family home regardless of when or how it was obtained) will be open to being divided equally between the parties to the relationship.

People often do not want their property divided along the lines set out in the Act.

A Contracting Out Agreement enables couples to contract out of the Act and enter into their own private agreement to determine the status, ownership, and division of their property upon separation or death.

In order for a Contracting Out Agreement to be legally valid, the agreement must be in writing and must be signed by both parties. Each party’s signature must be witnessed by a lawyer and each party must receive independent legal advice as to the effects and implications of the agreement.

The lawyer who witnesses the signature of a party must certify that they have advised as to the effects and implications of the agreement. Accordingly, preparing and executing an agreement is not a simple exercise.

It is very important that it is done correctly in order to properly protect assets from becoming relationship property, either immediately once the relationship qualifies (a qualifying relationship is a marriage, civil union or de facto relationship which is over three years long) or over time.

How common are they?

Contracting Out Agreements are very common, more so now than using Trusts to protect assets. This is because Trust assets can still be vulnerable to claims from an ex-partner in some circumstances, and may not be enough to protect property on their own.

If you have concerns about whether your Trust’s assets are adequately protected you may wish to consult a lawyer. While it is possible for the Court to later overturn a Contracting Out Agreement, if completed correctly it is usually very difficult to do so.

When should I get one?

You can enter into a Contracting Out Agreement at any stage of your relationship, even once your relationship crosses the three-year threshold.

However, it is often useful to have discussions about Contracting Out Agreements earlier on in a relationship, just in case your partner refuses to enter into one. Typically people are more inclined to agree to sign an agreement when they have not yet become entitled to the other person’s property.

Generally, partners may wish to consider entering into a Contracting Out Agreement in one of the following situations:

• When one partner has received an inheritance which they wish to protect as their separate property but which they wish to use for the benefit of the relationship;

• When one partner has significantly more assets than the other;

• When one partner may wish to protect their interest in a Family Trust from any future claims from the other;

• When partners are entering into a second relationship and wish to preserve their property from their first relationship for the benefit of their children from their first relationship; or

• When one partner has a significant amount of debt that the other does not wish to become liable for.

While these are some of the most common reasons, there are many more situations when entering into a Contracting Out Agreement may be appropriate.