Difference between Contracting Out & Relationship Property Agreements

Difference between Contracting Out & Relationship Property Agreements

By: MBC Law
October 27, 2020

The primary and distinctive difference between contracting out and relationship property agreements relates to the timing and status of a relationship between two parties. The definition and status of a relationship as a marriage, de-facto relationship or civil union, under the Property (Relationships) Act 1976 (“the Act”) is important in assessing a contracting out agreement (“COA”) or relationship property agreement’s (“RPA”) influence.

Essentially, a COA commonly known as a ”pre-nup”, is often (but not always) entered into at the start of a relationship, prior to the relationship being defined under the Act as marriage, de-facto relationship or civil union and before the couple is subject to greater legal requirements around relationship property division. Couples enter into the COA to define each party’s separate property, defining what would happen to that property if the relationship were to end.

On the other hand, an RPA, commonly known as a settlement agreement or separation agreement, is entered into once a relationship has ended, whereby the parties wish to distribute the relationship property assets.

Contracting Out Agreement

A COA is used to contract out of the general relationship property division principles under the Act; with those principles providing for an equal 50/50 split of the relationship property between the parties. It provides couples with the autonomy to decide how to split their assets if the relationship ends. Even if in the eyes of the law such a split may not be deemed as ‘equal’, the couples can subsequently waive those rights under a COA.

A COA is often seen in the case where one party enters the relationship holding significantly greater assets/wealth earned as their separate property or by an inheritance, which they wish to protect and keep separate in the event of separation. The COA is essentially a type of ‘insurance policy’ for either party to protect their assets or inheritance, despite every intention for the relationship to progress.

COA’s can be binding and important documents to review with your solicitor, hence Part 6 of the Act requires that your signature be witnessed by a solicitor who has certified that they have explained the contents and implications of the COA to you before signing. The court can declare a COA void if they view the COA lacks the fundamental principles of independent legal advice, disclosure or there is evidence of some kind of undue influence from one party to the other.

Relationship Property Agreement

In the case of a relationship separation, the Act establishes principles which govern the split of those assets, as mentioned above. When couples separate from each other they may wish to have some autonomy and choice in how the relationship property is split. An RPA (also known as a separation agreement) allows the parties to do this. Similar to a COA, the couple is able to contract out of the Act’s general principles of equal division and negotiate the distribution of assets.

Commonly, parties wish to enter into an RPA to define specific separate property, i.e. businesses, trusts, houses and/or shares/investments. Sometimes the parties wish to customise distribution as the process of equally dividing an asset/liability can be labour-some and disruptive or may cause unnecessary burdens for one party, for example, trying to sell an established business to split the equity.

Similar to the COA, the requirements on both parties to receive full disclosure of all assets and legal advice as to the implications of the RPA is vital. It is recommended that you contact a legal professional to discuss either agreement in detail.