A contracting out agreement NZ—often referred to as a “prenup”—is a legally binding contract created under Section 21 of the Property (Relationships) Act 1976. It allows couples to opt out of the standard equal sharing laws, specifying exactly how their assets, debts, and property will be divided if they separate or if one partner passes away.
Entering into a serious relationship, whether it be a marriage, civil union, or a de facto partnership, is primarily an emotional commitment. However, in New Zealand, it is also a significant financial event. The moment a relationship crosses the three-year threshold, the legal landscape regarding your assets changes dramatically. For many Kiwis, the realization that their partner may have a claim to half of their hard-earned assets comes too late.
While the term “prenup” is borrowed from American culture, the New Zealand equivalent is technically known as a “Contracting Out Agreement” or a “Section 21 Agreement.” These documents are powerful tools for asset protection, estate planning, and providing certainty in uncertain times. This guide serves as a comprehensive commercial investigation into the necessity, costs, and legal intricacies of these agreements within the New Zealand family law context.
What is a Contracting Out Agreement (Section 21)?
A contracting out agreement is a formal legal document that allows a couple to write their own rules regarding property division. Under New Zealand law, specifically Section 21 of the Property (Relationships) Act 1976 (PRA), couples are granted the statutory right to “contract out” of the Act’s provisions.
Without this agreement, the law dictates how your property is divided. By signing one, you are essentially telling the court: “We do not want the standard laws to apply to us; we have decided on our own arrangement.”
These agreements can be made at any time:
- Pre-nuptial: Before moving in together or getting married.
- Post-nuptial: During the relationship (often when assets change, such as buying a house).
- Post-separation: Immediately after a breakup (known as a separation agreement).
The Default Rule: The Property (Relationships) Act 1976
To understand the value of a contracting out agreement, one must first understand the default position. New Zealand operates under a regime of “equal sharing.”
Once you have been married, in a civil union, or in a de facto relationship for three years or more, almost all property acquired during the relationship—and significantly, the family home and family chattels regardless of when they were acquired—becomes “relationship property.”
The law assumes that both parties have contributed equally to the partnership, even if those contributions were non-financial (e.g., childcare, household management). Therefore, upon separation or death, all relationship property is divided 50/50.
The Family Home Trap
The most common shock for New Zealanders concerns the family home. Even if you owned the house 10 years before meeting your partner, once you live in it together as a couple for three years, it usually becomes relationship property. Without a contracting out agreement, your partner could be entitled to 50% of the home’s value, regardless of who paid the deposit or the mortgage.
Why You Might Need a Relationship Property Agreement
There is a lingering stigma that suggesting a contracting out agreement implies a lack of trust or an expectation of failure. However, legal professionals view these agreements as a form of insurance—prudent planning for unforeseen circumstances. Here are the primary scenarios where a contracting out agreement is essential.
Protecting Pre-Relationship Assets
If you enter a relationship with significant assets—such as a property portfolio, a business, or a substantial KiwiSaver balance—you may wish to keep these as “separate property.” An agreement can ring-fence these assets so they never enter the relationship property pool.
Inheritance and Gifts
While inheritance is generally classified as separate property, it can easily become relationship property if it is “intermingled.” For example, if you inherit $100,000 and use it to pay down the mortgage on the family home, that money legally disappears into the relationship property pot. A Section 21 agreement can specify that such contributions remain your separate property, entitling you to that sum back before the remaining equity is split.
Second Relationships and Children
For individuals entering a second or third relationship, protecting the inheritance rights of children from a previous relationship is paramount. Without an agreement, a new partner could claim half of your estate, potentially disinheriting your children. A contracting out agreement ensures that specific assets are preserved for your biological children.
Debt Protection
It is not just about assets; it is also about liability. If one partner carries significant debt (e.g., student loans, business debts, or personal loans), the other partner may wish to ensure they do not become liable for this debt upon separation. An agreement can clarify that debts remain the sole responsibility of the person who incurred them.
Distinguishing Separate Property from Relationship Property
The core function of the agreement is to classify assets into two buckets: Separate Property and Relationship Property.
- Relationship Property: Usually includes the family home, family vehicle, household furniture, income earned during the relationship, and superannuation accumulated during the relationship.
- Separate Property: Assets owned before the relationship began (provided they are kept separate), inheritances, taonga (treasured items), and gifts from third parties.
A contracting out agreement allows you to redefine these buckets. You can agree that the family home will remain separate property, or that income earned remains separate (common in relationships where finances are kept strictly apart).
Strict Legal Requirements for Validity
New Zealand courts are very strict regarding the validity of Section 21 agreements. You cannot simply write a contract on the back of a napkin and sign it. If the proper procedure is not followed, the court will declare the agreement void, and the standard 50/50 rules will apply.
According to the New Zealand Law Society, for a contracting out agreement to be valid, it must meet the following criteria:
- Written Document: The agreement must be in writing.
- Signatures: Both parties must sign the document.
- Independent Legal Advice: Each party must have their own independent lawyer. You cannot use the same lawyer.
- Certification: Each lawyer must witness their client’s signature and certify that they have explained the effects and implications of the agreement to their client before signing.
This requirement for independent advice is a critical safeguard. It ensures that one party is not being bullied or misled into signing away their rights without understanding the consequences.
How Much Does a Contracting Out Agreement Cost in NZ?
The cost of a contracting out agreement varies significantly based on the complexity of your assets and the negotiation process. Because two lawyers are legally required, you are effectively paying two sets of legal fees.
Standard Agreement Costs
For a straightforward agreement—where one party brings a house, the other has few assets, and both agree on the terms—the costs generally range from:
- Drafting Lawyer (Party A): $1,500 – $2,500 + GST.
- Reviewing Lawyer (Party B): $800 – $1,500 + GST.
Total Estimated Cost: $2,300 – $4,000.
Complex Agreement Costs
If the relationship involves trusts, businesses, overseas assets, or if there is significant back-and-forth negotiation regarding the terms, costs can escalate quickly. It is not uncommon for complex agreements to cost between $5,000 and $10,000 in total.
While this may seem expensive, it is a fraction of the cost of a contested relationship property dispute in court, which can easily run into the tens of thousands of dollars.
Can an Agreement Be Overturned?
A contracting out agreement is robust, but it is not bulletproof. Section 21J of the Property (Relationships) Act gives the court the power to set aside an agreement if giving effect to it would cause “serious injustice.”
Factors the court considers when determining serious injustice include:
- Length of time: An agreement that was fair after 2 years might be grossly unfair after 20 years, especially if children have been born and one partner’s career has been sacrificed.
- Change in circumstances: If the agreement did not anticipate major life events (e.g., one partner becoming disabled).
- Unfair process: If one party was pressured (duress) or if there was non-disclosure of assets (hiding money) during the drafting phase.
To prevent an agreement from being overturned, lawyers often recommend reviewing the document every 3 to 5 years, or upon the birth of a child, to ensure it remains fair.
The Step-by-Step Process of Drafting an Agreement
If you have decided that a contracting out agreement is right for your relationship, follow this workflow to ensure efficiency and validity.
1. The “Kitchen Table” Discussion
Before involving lawyers, sit down with your partner and discuss what you want to achieve. Agreeing on the core principles (e.g., “what I had before is mine, what we build together is ours”) can save hours of legal fees.
2. Full Financial Disclosure
Compile a list of all assets and debts. Transparency is mandatory. If you hide assets, the agreement can be voided later. Gather bank statements, valuation of properties, KiwiSaver balances, and vehicle details.
3. Drafting the Agreement
One partner instructs their lawyer to draft the agreement. This lawyer will advise their client on what is legally prudent. The draft is then sent to the other partner.
4. Independent Advice
The other partner takes the draft to their own lawyer. This lawyer will critique the agreement, suggesting changes if it is too one-sided or unfair. Negotiations may ensue.
5. Signing and Certification
Once the terms are finalized, both parties sign in front of their respective lawyers. The lawyers sign the certification certificates. The original copies are usually kept in the lawyers’ deeds safe.
For more detailed information on the legislation governing these agreements, you can refer to the Property (Relationships) Act 1976 text directly.
Conclusion
A contracting out agreement in NZ is a practical tool for modern relationships. It provides clarity and protection, allowing couples to focus on their partnership without the looming anxiety of financial uncertainty. While the upfront cost and the awkwardness of the conversation can be deterrents, the peace of mind and financial security they provide are invaluable. Whether you are protecting a family inheritance or simply want to keep finances separate, a Section 21 agreement is the only way to ensure your wishes override the default settings of the law.
People Also Ask
Does a prenup stand up in court in NZ?
Yes, a prenup (Contracting Out Agreement) generally stands up in court in NZ provided it meets the strict requirements of Section 21 of the Property (Relationships) Act. This includes being in writing, signed by both parties, and having independent legal advice certified by lawyers. However, courts can set them aside if they cause “serious injustice.”
How much does a contracting out agreement cost in NZ?
The cost typically ranges between $2,000 and $4,000 + GST for a standard agreement. This covers the fees for two separate lawyers, which is a legal requirement. Complex agreements involving trusts or businesses can cost upwards of $5,000.
Can I write my own contracting out agreement?
No, you cannot effectively write your own contracting out agreement in NZ. While you can draft the terms, the agreement is legally void unless both parties receive independent legal advice and a lawyer certifies that they explained the effects of the agreement to you.
When does a de facto relationship start for property rights in NZ?
A de facto relationship generally starts when two people begin living together as a couple. Property rights under the Property (Relationships) Act usually apply once the relationship has lasted for three years, though there are exceptions for relationships of short duration involving children or substantial contributions.
What assets are protected in a contracting out agreement?
You can protect almost any asset, including the family home, KiwiSaver, superannuation, business interests, investments, and inheritances. The agreement specifies which assets remain “separate property” rather than becoming “relationship property.”
Can a contracting out agreement be overturned?
Yes, under Section 21J of the Act, a court can set aside an agreement if giving effect to it would cause “serious injustice.” Courts look at the length of time since signing, changes in circumstances (like having children), and whether the agreement was fair at the time it was made.
