What’s the difference between a Contracting Out Agreement and a Relationship Property Agreement?

Sophie Hutchinson

Contracting Out Agreements and Relationship Property Agreements both allow couples to determine how their property will be divided themselves, rather than relying on the default rules under the Property (Relationships) Act 1976 (“the Act”).

The key difference is when and why the agreement is made.

A Contracting Out Agreement, also known as a pre-nuptial agreement or “pre-nup”, is entered into under s 21 of the Act before or during a relationship. It allows a couple to decide in advance how their property will be treated if they later separate, or one of them dies.

A Relationship Property Agreement (“RPA”), sometimes called a separation or settlement agreement, is entered into under s 21A of the Act after a relationship has ended. Rather than deciding in advance what would happen on separation, the parties involved are negotiating and recording how their property will be divided following their separation.

Contracting Out Agreements under s 21

Under the Act, relationship property is generally subject to equal division when a qualifying relationship ends. A contracting-out agreement allows couples to “contract out” of those default rules and agree on their own arrangements.

This can be done before a relationship begins or at any point during the relationship. For example, couples may choose to enter into a contracting out agreement:

  • before getting married or entering a civil union;
  • before or after becoming a de facto couple;
  • before purchasing a home together;
  • before having children;
  • when one person moves into a property owned by the other;
  • when one party receives or expects to receive an inheritance;
  • when one party owns a business, shares or significant investments; or
  • where the parties simply want certainty about their financial arrangements.

For example, one person may enter a relationship owning a home or business that they want to retain as their separate property. A contracting out agreement can record that intention and set out what, if anything, the other partner would receive if the relationship later ended.

Although contracting out agreements are often associated with protecting the wealthier partner, they can provide certainty and protection for both parties. A well-drafted agreement can establish each person’s rights from the outset and reduce the scope for uncertainty or dispute if circumstances change down the line.

If you are unsure whether the Act applies to your relationship, or if a contracting out agreement might be needed, see our article: Are you in a de-facto relationship? It might be time to get protected.

Relationship Property Agreements under s 21A

A relationship property agreement serves a different purpose. It is entered into after a marriage, civil union or de facto relationship has ended.

At that stage, the parties are no longer deciding what would happen if they separated. They have separated, and the purpose of the agreement is to negotiate, record and implement the division of their relationship property.

The Act provides default rules governing how relationship property is divided. As a general rule, everything is split equally between the two parties. However, separating couples might agree on a different outcome and record that agreement in a relationship property agreement under s 21A.

A relationship property agreement might deal with:

  • who keeps the family home;
  • how mortgages and other debts will be dealt with;
  • businesses and company interests;
  • trusts;
  • shares and investments;
  • vehicles, jewellery and personal property;
  • KiwiSaver and other financial assets; and
  • equalising payments made by one party to the other to achieve the agreed division.

There may also be practical reasons why an exact division of every individual asset is undesirable. For example, selling an established business simply to divide its value may be disruptive and commercially impractical. Instead, one party might retain the business while the other receives different assets or a balancing payment.

The relationship property agreement records the overall settlement reached between the parties and provides certainty about their respective property rights following separation.

Are these agreements legally binding?

Both s 21 and s 21A agreements are subject to strict formal requirements under the Act. Among other requirements, each party must receive independent legal advice, each signature must be witnessed by a lawyer, and the lawyer must certify that they have explained the effect and implications of the agreement to their client.

These safeguards are important because entering into either type of agreement can involve giving up rights that a person would otherwise have under the Act.

An agreement that does not comply with the statutory requirements may be invalid. Even where the formal requirements have been met, the Court has power in certain circumstances to set an agreement aside if giving effect to it would cause serious injustice.

Whether you are looking to establish your property arrangements during a relationship, formalise the division of property following separation, or need advice about an existing agreement, it is important to obtain independent legal advice about your circumstances.

If you have concerns about whether a contracting out or relationship property agreement is valid or fair, or whether there may be grounds for an agreement to be set aside, contact our relationship property team for advice.