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Duncan King Law: Investment Property and the Property (Relationships) Act 1976

Wednesday, February 14, 2018

The Property (Relationships) Act 1976 (“PRA”) sets out the rules for how couple’s property is dealt with. The PRA applies to couples who are married, or in a civil union, or de facto relationship, a category which includes couples who don’t live together.

The PRA divides property (which includes assets and liabilities) into relationship property, which is most often shared equally by the partners and separate property, which is solely owned by one partner. There is no middle state under the PRA for relationship property and usually relationship property is divided equally regardless of contributions. The default position is that property acquired during the relationship or separate property that is used during the relationship is relationship property. For example, if Alice buys an investment property during her relationship with Bob, it is relationship property. If Alice buys a property before the relationship from her own money but Alice and Bob live in the property together, it is relationship property.

Furthermore, if separate property is intermingled with relationship property or if the other partner carries out work on the separate property, the separate property becomes exposed to a relationship property claim. For example, if Alice purchased an investment property before she met Bob, but uses her income to pay the mortgage, Bob could make a claim against Alice for a half share of the amount that she paid and possibly claim a portion of any increase in value if it can be linked to the application of Alice’s income.

As you can see from the above examples, relationship property is a very complex area that is very dependent on the particular circumstances of your relationship. However, there are a number of steps you can take to give yourself certainty.

Firstly, consider setting up a trust to own your separate property before you enter into a relationship. The trust should not rely on future gifts from you. This provides greater clarity around incomes and makes it less likely that the separate property would be intermingled. That being said, a trust does not always protect against certain types of relationship property claims. It is unlikely to be enough on its own. Furthermore, there may be tax inefficiencies with using a trust to own investment properties. Therefore, a trust may not be suitable for everyone.

Secondly, when you enter into a new relationship, you must have a serious conversation with your partner about each other’s current assets and income and how each party sees things working in the future. This gets everything out in the open and allows both partners to be on the same page about how money is going to be dealt with. Keep having these conversations regularly and if there are any major changes. This may be uncomfortable, and it may even lead to a breakup, but if there are differences of opinion, for example, if Bob thinks that he’s going to live off Alice’s income and have a half share in her assets without contributing, when Alice thinks that Bob is only going to be entitled to what he contributes, there is going to be serious conflict and the longer it is left, the nastier the conflict is going to be.

Thirdly, if for any reason you and your partner are going to purchase property during the relationship and do not want to contribute to property in equal shares, if there is a major difference in assets, or if you have a trust that won’t benefit your new partner, consider entering into a contracting-out agreement (also known as a property relationship agreement or a section 21 agreement). A contracting-out agreement allows you and your partner to agree that property is separate property or relationship property, or that future property may be owned and purchased in unequal shares. Done correctly, it will give you much more flexibility and protection around your property arrangements. For example, Alice and Bob could agree that Alice’s initial rental property is her separate property, regardless of any contribution that Bob makes and that any investment properties they purchase in future will be owned in proportion to the amounts Alice and Bob contribute to the purchase price and that they will contribute to outgoings in those portions.

Finally, you should review your contracting-out agreement on a regular schedule, such as every five years, or upon major events occurring such as marriage or children.

By taking these steps, and listening to the advice of your lawyer and accountant, you should be able to avoid all the unpleasantness and conflict that comes from not being prepared.

This article is of a general nature only and is not intended to be legal advice. If you require legal advice, please speak to your lawyer.


ABOUT THE AUTHORS

Kristine King

Kristine is a Director of Duncan King Law and works primarily in the areas of property, commercial law and trusts and has a passion for working with property developers and property traders.

In addition to her legal work, Kristine is the Auckland area legal speaker for the ANZ Property Unlocked Seminar series and undertakes staff training on property issues for organisations such as ANZ and Bayleys. Kristine also provides specialist advice to the New Zealand Law Society on property matters during her work as a Standards Committee member.

 

Shaun Peacock

Shaun graduated from the University of Otago in 2013 and acts for clients on a broad range of commercial and property matters, from conveyancing and subdivisions to commercial leases and business transactions.

Outside of work Shaun is a member of the community service organisation Rotaract, and participates and organises a variety of community service and environmental projects, both in Auckland and abroad. 


 

 

 

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