What a contracting out agreement is really used for
Hollywood has created a stigma that prenups and high-profile celebrities are a match made in heaven. There is a belief that anyone wealthy or famous needs a prenup, so they don’t lose half their fortune.
In the real world, prenups are called contracting out agreements. They are an effective and sensible way for people in relationships to agree in advance how they would like to divide their property in the event of separation or death. Unlike the movies, they are not limited to the ‘elite’ but are increasingly common in relationships between everyday people.
There is a presumption under the Property (Relationships) Act 1976 (PRA) that once you have been in a ‘qualifying relationship’ for three years, relationship property will be divided equally. If you do not wish for that to happen, you can enter into a contracting out agreement pursuant to section 21 of the PRA. This section allows couples to set their own rules for how property is to be divided between them on separation or death. Without a contracting out agreement, the provisions of the PRA apply and your property may be divided in a way that you had not intended.
This is where the common misconceptions start. Yes, a contracting out agreement can be a tool for a wealthy partner to protect their assets, however there are a number of other reasons why people might enter into a contracting out agreement.
For example, when one party:
- Moves in with their partner who already owns the property;
- Has brought significant assets to the relationship;
- Has received a gift, inheritance, or distribution from a trust;
- Has received a gift (perhaps from parents) to help them get on the property ladder;
- Wishes to provide for children from a previous relationship;
- Has high risk business or partnership interests; or
- Estate planning generally.
Contracting out agreements can be entered into in contemplation of entering into a ‘qualifying relationship’ or during a relationship (both before the three-year mark, and after).
There are strict procedural requirements that need to be followed for a contracting out agreement to be valid and enforceable including:
- The agreement must be in writing;
- It must be signed by each party and witnessed; and
- Each party must receive independent advice from a lawyer who then certifies that they have explained to that party the effects and implications of the agreement.
Talking with your partner about how your assets should be divided if you separate in the future will not be easy but is often necessary if you want to achieve certainty and protect specific assets as your separate property. Having a layer of security to know what is yours, and theirs, will make things a lot easier if you do part ways in the future.