Do our relationship property sharing laws need a radical shake-up?

The Law Commission is reviewing 40-year-old laws governing how property is divided when relationships break up.
Natalia Sinelnik/123RF

The Law Commission is reviewing 40-year-old laws governing how property is divided when relationships break up.

Three years they've been bickering. With the family home and lifestyle block finally settled, now, they're reduced to fighting about $420 camping gear; a $227 satellite dish and "very contentious" venetian blinds.

The lawyer for their three sons worries the court fight's bitter bile is filtering down to the kids.

"This case has got to come to an end," Family Court Judge Tony Lendrum declares. "Everybody in this case is exhausted."

Relationship property cases are a parade of poison-laced misery. All that promise, those lovingly personalised vows swept aside in a cold, hard grab for cash.

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In one case, a couple married for fewer than three years have spent double that time fighting over "modest property". In a judgment headed "The system fails", High Court Justice Paul Heath pleads for better resources for the Family Court, saying both parties are "emotionally and financially exhausted".

Otago University professor and family law expert Mark Henaghan agrees the system is failing. There's too much discretion to bend to every imaginable circumstance. Discretion creates uncertainty, and uncertainty breeds protracted and messy court battles, which chew up hundreds of thousands of dollars in legal fees. It's the exact opposite of the law's stated purpose – to resolve post-split disputes "inexpensively, simply, and speedily".

"It's so bloody pointless, when you've got kids and other people to give the money to," Henaghan says. "Once people start filing affidavits against each other accusing them of all sorts of stuff, there's no stopping it. It just becomes like a runaway train and it's so, so sad ... The whole purpose of the law is to make clear what the entitlements are. We are failing in our law if we're not doing that. The law should be almost formulaic – says what it is, bang, get on with it ...

"It's a bit like the road code. What's the speed limit here? 50? Fair enough, that's it. If the speed limit was whatever speed you thought was appropriate then we'd be arguing forever."

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If Paul McCartney and Heather Mills had married and divorced in New Zealand, she would not have been entitled to his Beatles earnings as they would have been classified pre-existing, separate property. Photo: Dan Chung/Reuters

New Zealand's relationship property law was passed the same year John Walker won Olympic gold in the 1500m. Fewer than half of 25 to 35-year-old women worked and the median age of divorce was a decade earlier than it is today.

For the first time, the 1976 Property (Relationships) Act recognised that, irrespective of financial contributions, a marriage was an equal partnership and property should be shared equally on separation.

Some argue the 41-year-old legislation has held up well, helped by a 2001 amendment incorporating de facto couples who live together for more than three years. But others contend relationship structures are so altered that the principle of going halves should no longer be a given.

​Both perspectives will be examined in the Law Commission's current review of the legislation, which will consider everything from access to property hidden in trusts and compensation for time out of the workforce looking after children, to whether a 50/50 split is still a fair deal in a world of second and third relationships with pre-existing property.

​Law Commission senior adviser Lisa Yarwood says the social change since 1976 has been phenomenal – from the traditional lifelong marriage with kids to today's tangled web of blended and sequential families and de facto and same-sex couples.

"How can it possibly be fit for purpose given how much times have changed? But maybe if you peel back the layers of what it was trying to do in 1976, maybe we'll find it's exactly the same in 2017."

Mary's* attitude suggests it's not. At 45, she's already endured two relationship property divvy-ups. Her first marriage, in Britain, lasted about 3 years. They had similar incomes and bought the house together so split everything 50/50. She's not the emotional type, but it still felt like a bereavement.

"That's seven years of your life and you're getting down to this funny bit of paper. We were already emotionally damaged, the last thing we wanted was to damage each other financially as well. I know people who have engaged lawyers and ended up with nothing, because they would rather fight to the death than give the other person a cent."

Second time around she met a guy and they moved to New Zealand as a de facto couple. They'd been together five years when they separated – ridiculously short to warrant going halves, she reckons. The qualifying threshold should be 10 years at least for de factos. But the law was clear. He wanted the boat so she took more from the house.

After that split, Mary bought her own Auckland apartment. She met a man and fell in love. He moved in, but before they'd been living together two years she asked for an agreement contracting out of the Property (Relationships) Act, to protect her beloved flat.

"I don't care how awkward it is. This is my financial future that I have to take care of."

They agreed they'd keep their respective houses and he would keep his business. Anything they did together would be joint property. They're now happily married, but Mary has no regrets. In fact, she thinks property agreements should be mandatory.

"If you get wealthy through marriage or through living with someone – I know this sounds really harsh – I struggle to see the difference between that and prostitution. Sure, there's a bit more emotional investment, but basically you have sex with someone for three years and then you're entitled to half their wealth. Really?"

MY HOUSE, MY CASTLE

The rules

Generally speaking, inheritances, gifts, and property owned by one partner before they lived together remain that person's separate property, as long as they don't become intermingled with joint property.

However, the family home and its chattels are joint assets, irrespective of when they were bought, and by whom. You can contest a 50/50 split, if the circumstances are extraordinary and equal sharing would be "repugnant to justice".

Case study: The late-life second relationship (Bowden v Bowden)

Judith gave up her state house to move in with Gordon, bringing only some furniture. They both worked and kept their finances separate. Gordon paid the rates, insurance and electricity and Judith contributed $100 a week.

They'd been living together, in Gordon's freehold home, for three years and two days when Gordon died from cancer. The day before he died, he bequeathed his estate to his son from his previous marriage, with provision for Judith to continue living in the house.

Judith then claimed half Gordon's property, including a $100,000 ACC payment for asbestos exposure, which happened before their relationship but was paid during it. She argued it was not extraordinary for one partner to provide all the relationship assets and it was important not to devalue the intangible benefits of love, friendship and support.

The High Court decided a 50/50 split would be repugnant to justice. Based on her contribution to the relationship, Judith got 20 per cent of Gordon's house, chattels and ACC payment.

Filling his walls with a lifetime of artworks proved costly for a New Zealand artist. Photo: Getty

Case study: The artist whose life-long art collection became ornaments

Artist Bill* owned a house, whose walls were hung with a lifetime worth of art – both his own and gifts from other artists. When Emma* moved in, she brought a bike and cash.

The couple married 2½ years later and split two years after that. During the relationship, they shared household chores and Emma set up a postcard business featuring Bill's art.

When they split, Emma accepted that Bill's pre-relationship artworks in his studio, 10 metres from the house, were his separate property. Bill accepted that art bought or created during the relationship was joint property.

However, Emma claimed the $350,000 art collection in the house was joint property, despite pre-dating her. Bill argued the collection was of such sentimental value it was a taonga and should be exempt, but the judge found the artworks had been used as "household ornaments" and were therefore family chattels.

The judge said equal sharing would be "repugnant to justice", "when the bulk of those assets have been created through the artistic endeavours and associations of [Bill] over so many years". He therefore awarded Bill 60 per cent.

Emma also claimed spousal maintenance. Her weekly budget included $240 for groceries, $192 for clothes and shoes and $96 for holidays. All up, Emma was awarded $339,000, minus lawyer's fees, which were "well in excess of $100,000".

If your home is your castle, you might want to shore up its defences. 

If you owned the place freehold before your partner moved in, too bad. The home a couple live in, and its contents, are shared property irrespective of who bought them and when. So after three years of living in it, they get half. But if you turn that same house into an investment property and keep both the house and income entirely separate from your joint finances, it remains yours alone.

The artist's case is typical of those that appear most unfair. Several years on, he's still livid at having to pay "for the privilege of keeping my own art".

"Nothing about this felt fair and reasonable to me ... For the rest of my life the anger that legal conclusion generated will simmer within me."

He believes three years is far too short a union to warrant a 50/50 property split. Instead, he advocates a sliding scale of division, based on the relationship's duration. He also wishes he'd signed a pre-nuptial agreement to protect his house and art, undertaken mediation or settled privately instead of going to court.

 In a paper for a December conference, the lawyer who represented the artist's wife used the case to illustrate that the present law "is capable of, and does result in significant injustice". She questioned whether artworks should be considered family chattels and argued courts should have greater discretion to over-rule the normal 50/50 split.

Asked to clarify her position, the lawyer said her comments in the paper were designed to generate discussion and were not intended for public circulation. They were not an expression of her personal opinion on the outcome of the case. She had the paper removed from the public website hosting it.

The artist said the lawyer's paper showed "the heart of the problem with the adversarial system": "Justice is not the point: winning is."

 

 

About 95 per cent of relationship disputes are settled out of court, with the help of lawyers like Rohan Cochrane, of Wellington's Family Law Specialists. He believes family courts need greater powers over trusts, and inconsistencies between de facto and married couples need ironing out. However, he argues the law still largely works and some of the worst injustices result not from bad law, but from the fact one partner is set on fighting "tooth and nail to the bitter end" and the other just wants to move on.

Cochrane says people who own a freehold home, drift into a de facto relationship and then separate shortly after passing the three-year qualifying threshold are among those who feel most aggrieved. And most can't afford the time, effort and cost of going to court to argue that equal sharing would be "repugnant to justice".

Professor Nicola Peart, an Otago University relationship property expert, says the automatic splitting of the family home made sense when dealing with the single nuclear family of 40 years ago. But what if the husband or wife buys out the other's share in the family home and wants the children of that marriage to inherit it. Then a new relationship begins, the house becomes the family home of that new relationship, and the children of the first relationship lose out.

New Zealand's huge number of family homes in trust suggests many Kiwis think that would be unfair. 

"If you're going to talk about people sharing the fruits of their partnership, then including the family home regardless of who brought it in doesn't actually fit with that concept," Peart says.

An alternative would be for the owner to retain the $600,000 the home was worth when the relationship began, but any value increase becomes shared property, in recognition of the money, time and work the other partner invests during the relationship. 

But Victoria University family law expert, Bill Atkin, suggests the opposite extreme – broadening the starting point so all property is shared.

"If you start there, you've got a relatively simple rule."

I LOVE YOU AND I WANT YOU TO SIGN THIS

The rules

At any stage of a relationship, couples can contract out of relationship property law. Both parties must get independent legal advice.

Agreements can be overturned in court if implementing them would "cause serious injustice".

Case study: ​The pre-nup that wasn't

Kylie* wanted to put her new love's mind at ease. She'd gone bankrupt the year before, owing $34,500. She now owned two horses and a negligible super fund. Sam*, meanwhile, owned a $245,000 house, about $85,000 in savings, $30,000 worth of music equipment and a Nissan Patrol.

Soon after Kylie moved into Sam's house, the couple signed an agreement contracting out of normal relationship property sharing laws, having both got legal advice as required. The contract basically said whatever they owned then was theirs forever and any future property would be shared in proportion to the sums each partner invested.

The pair married three years later but split after living together for five years. Kylie applied to overturn the contract, or pre-nup, on the grounds she hadn't received proper legal advice and the agreement was seriously unjust as it didn't recognise her future contributions to Sam's home.

Following evidence from Kylie's friend that she was so besotted she would have jumped off a cliff for Sam, Judge Binns accepted Kylie would have signed any agreement even if unfair to her. Nonetheless, her lawyer's failure to record any concerns meant Kylie had not received acceptable advice, so the agreement was void.

However, Judge Binns found it "unconscionable" to disregard the agreement entirely, so awarded Sam 63 per cent of the total property, while Kylie got 37 per cent.

Case study: The leading divorce lawyer and the step-son

Leading divorce lawyer Lady Deborah Chambers and her husband, Supreme Court judge Sir Robert did everything right, but still ended up in court. Both had two children from a previous relationship.

When they got together, Sir Robert owned a Remuera home and Deborah had cash to a similar value, which they later used to buy a $1m beach house and renovate the family home.

They signed a relationship property agreement in 2002 stating that, in death, the other partner would get the family home and beach house and 50 per cent of any remaining property, with the other half going to the other partner's children.

In 2013, they changed the terms, giving the children of the partner who died first an "enforceable entitlement" to a quarter of the relationship property, capped at $2.5 million. However, the entitlements didn't have to be paid immediately and protecting them should not "restrict the survivor's enjoyment of life".

When Sir Robert died, his son – a California-resident software engineer earning US$120,000 a year – argued his $2.5m should be paid immediately. The High Court largely rejected his claim, but found Deborah must "exercise her discretionary power from time to time" to recognise any change in circumstances.

***

Contracting-out agreements are considered the safest way to protect pre-existing property. But they can still be challenged, if they would cause serious injustice.

An agreement that says simply what's mine is mine and what's yours is yours forever more is unlikely to wash with the courts. While that might be fair while both partners are earning, it quickly becomes unjust if one partner takes 10 years off work to look after children while the other partner continues squirreling KiwiSaver funds and climbing the career ladder.

The number of couples signing contracting-out agreements would be a great gauge of how many Kiwis think the existing law is unfair. Trouble is, while everyone agrees they're becoming more common, no-one can put a figure on it.

Cochrane says clients whose break-up settlements he's dealt with often return quick smart when they start a new relationship, wanting to protect their existing property. It's not uncommon for the poorer partner to drive the agreement, wanting to prove it's not about the money. 

He says often couples will make a simple agreement ring-fencing the value of their assets when the relationship started. So if one partner owned a $600,000 house that became the family home and is now worth $1m, they would take out their $600,000 and split the $400,000 increase in value.

The trouble with pre-nups is they're mighty awkward to discuss, Cochrane says.

"It is such a difficult thing for people to raise. I think that's often under-estimated.That when people are in the relatively early stages of a committed relationship, having a discussion which says 'I love you ... and if we separate I don't want you to claim against the half million dollars that I'm putting into our house.' That's a really tough discussion for people to have."

Deborah Chambers says there's something obviously wrong when a highly experienced divorce lawyer and a Supreme Court judge draft a detailed pre-nup and still end up in court. However, her beef is with the "real mess" of death provisions rather than pre-nups.

"I think it's a disgrace, whenever anyone dies someone has a bloody crack. It costs a fortune, it destroys family harmony. It has been an absolutely tragic experience for me. I had just lost the man I loved, then this. It brought me to my knees. No-one else should have to go through what I went through."

LOVE AND TRUST

The rules:

Trusts are used as back-door pre-nups, on the basis you no longer own property that's in a trust, so can't be made to share it.

The law provides limited scope for trust-busting, via the Property (Relationships) Act (PRA) and the Family Proceedings Act, which does not apply to de facto couples.

The PRA allows judges to order compensation if joint property was transferred to a trust during the relationship, defeating the rights of one partner.

The Family Proceedings Act allows courts to order changes to trusts which are "nuptial settlements".

Case study: Clayton v Clayton

Melanie and Mark Clayton began living together in 1986 and married in 1989. Melanie signed a pre-nup limiting her post-separation entitlement to $30,000. Before separating in 2006, the couple had two children and Mark had set up a successful sawmilling business and created two trusts.

Mark argued his former wife should get only the former family home, worth $850,000, and $30,000. Melanie, however, claimed a share of the two trusts, which were worth up to $29m.

The case took a decade and went all the way to the Supreme Court. The couple settled before the decision, but the judgment has been labelled a landmark for trust-busting in divorce. The judges found the Claymark Trust, despite being set up for business purposes, was a nuptial settlement. Had the couple not settled, the court would have ordered the trust to be split into two equal shares.

Case study: The family trust to protect the grandkids' inheritance (Da Silva v Da Silva)

About halfway through the da Silvas' 25-year marriage, Mrs da Silva's mother set up a trust to protect her $2m worth of assets for the next generations. She, Mrs da Silva and the da Silvas' five children were beneficiaries.

Mr da Silva argued the trust was a post-nuptial settlement and he should get half its assets. Justice Peters disagreed, noting his mother-in-law "made a deliberate decision not to include Mr da Silva as a beneficiary".

When Mark Henaghan analysed 69 court cases to investigate whether women were getting a raw deal, he found most cases ended in a 50/50 split. The question is, 50 per cent of what? If one partner has diverted assets into trusts, that can slash the other partner's entitlement. In one case analysed, the property deemed legally shareable made up just 0.6 per cent of the husband's total worth.

In the four decades since New Zealand's relationship law was enacted, trusts have become the middle class accessory of choice. Trusts for tax purposes. Trusts to subvert residential care subsidy rules. Trusts to secure the family home for the next generation.

As trust law expert Vicki Ammundsen puts it, "Why do so many people in New Zealand settle trusts? Because their neighbour's got one."

Which means there's a fair chance any relationship property dispute walking through Cochrane's door includes a trust. If it's a classic family trust, with both partners as trustees and beneficiaries, it's usually treated as relationship property and split 50/50.

But then there's the family home held in trust for the former family. Or assets in a trust controlled only by the husband and his accountant.

The Clayton case raised fears on one side and glee on the other, at the prospect of wholesale trust-busting. The reality, says Ammundsen, is "not many people are actually both physically and emotionally resourced to be able to run a case like that".

The decision that the Claymark Trust was a "nuptial settlement" – despite being set up for business – could increase trust-busting claims. But the Family Proceedings Act does not apply to de facto couples, so the same set of facts could produce polar opposite results, depending on whether the couple were married or not.

There's general agreement the Law Commission must sort out that anomaly and clarify the status of trusts in separation stoushes.

Deborah Chambers, who represented Melanie Clayton, is a fan of New Zealand's protection of separate property – if Paul McCartney and Heather Mills divorced in New Zealand his Beatles earnings would have been off limits, "because he hadn't clapped eyes on her then". But if property built up during a relationship is hidden in a trust, it should still be treated as joint property.

"Prior to Clayton, people were hiding money, saying 'You can't touch it because it's in a trust'. That was seriously unfair ... You had women after a long, dedicated marriage coming out with nothing and him whizzing off with all the dough."

Ammundsen argues Kiwis have far too many trusts and advises against relying on them to protect property from a future partner's claim.

"A contracting-out agreement is generally going to be a far better tool, but the problem is you have to get agreement. And if my future spouse or partner won't agree, I'm still likely to be better settling a trust than I am to cross my fingers and hope the relationship works."

BANK OF MUM AND DAD

The rules:

If it was a loan, it has to be paid back. If it was a gift, it becomes part of the couple's joint property.

Case study: The rich-lister family and the ex son-in-law (Goodfellow v Brown)

Richer-lister parents Bruce and Marion Goodfellow provided $422,000 to help their daughter Claire and her husband Nigel Brown buy a house on Auckland's North Shore.

When the pair later split, the Goodfellows took Brown to court to recover the money, arguing it was a loan that had to be repaid.

Brown, however, argued the money was part repayment of a debt and belonged to Claire.

***

As the housing crisis bites, more young couples are looking to their parents for help to buy a house. Often, the money goes undocumented until the couple split and mum and dad want their contribution back.

If there's no paperwork, the parents will always argue it was a loan while the child's ex will argue it was a gift. Auckland divorce lawyer Jeremy Sutton says it's a particular problem among the Asian community. Those cases often go to court, because there's big money at stake. 

The trick is to draw up an agreement at the time of purchase, making it clear the money is a loan – even if the parents are happy for the couple to keep it if they stay together. You can forgive a loan, but you can't claim back a gift.

Another option is for the parents to own a proportional share of the property.

Clear documentation upfront avoids bitterness and wildly different recollections, Cochrane says. 

"It's not just naked self-interest and it's not just people making things up later on to suit themselves. We all tend to view our recollections based on where we are now. It's a very human thing to do. So you'll often end up with both people swearing that the other person is lying."

A 2001 amendment to relationship property laws was supposed to rebalance the scales for women who have given up a career to look after the kids. It has had limited success. Photo: 123rf

BUT I QUIT WORK TO LOOK AFTER THE KIDS

The rules:

A 2001 amendment to the 1976 act enabled judges to compensate partners left post-separation with an income and living standard significantly lower than their ex, as a result of the division of functions within the relationship. The most obvious scenario is when one partner has given up their career to look after children. 

Case study: The high fliers (X v X)

Top accounting students Mr and Mrs X met at Auckland University. After marrying in 1982, they travelled, with both working for international firms. 

While Mr X continued climbing the professional ranks, Mrs X stopped working in 1989, to look after the first of two children.

After the couple's 2003 separation, Mrs X continued as the children's primary caregiver. In 2006, she found a $55,000-a-year accounting job.

In addition to half the $9m in shared property, Mrs X claimed compensation, as her 14 years out of the workforce had drastically reduced her earning power, leading to a disparity in income and living standards. She initially claimed $1.5m but reduced that to $400,000.

She was awarded $240,000, which was upheld by the Court of Appeal.

"In this case Mrs X clearly sustained a loss in earning potential as a result of her role in a lengthy marriage. She is entitled to an award under s15 that recognises that loss, and which compensates her over the period in which she is getting back on her feet."

Case study: The surgeon and the nurse (Jack v Jack)

When the couple met, Mrs Jack was a self-sufficient single mum with a 3-year-old daughter. An enrolled nurse, she owned two flats.

Mr Jack - a trainee surgeon - moved into one of Mrs Jack's flats and the couple married and had two children. Mrs Jack stayed home to look after the kids, but at one stage worked night shifts part time.

Their marriage broke up in 2008, after 28 years. Mr Jack paid $372,000 in maintenance for the following 4 ½ years. Mrs Jack returned to work in 2012, earning $26,000 as a beauty salon receptionist.

Mr Jack argued had Mrs Jack not stayed home he would have simply employed a nanny. Justice Goddard, however, found Mrs Jack's homemaker and child carer role helped make her husband successful and split the relationship property 70/30 in her favour.

***

There's general agreement that the 2001 amendment to recognise economic disparity – section 15 – has been a failure in the courts. It was supposed to compensate partners – usually women – who found themselves with grossly lower living standards on separation, caused by their role in the marriage. In practice it is too clunky and costly to prove and the sums awarded too small to warrant the effort.

Sutton sees cases of partners in their late 50s with little hope of reprising the career they gave up to look after the home and kids. They can struggle just to make ends meet, relying on friends and family while waiting seven or eight months to get spousal maintenance and then facing an expensive court case to even up the scales.

While section 15 has not been a success in the courts, Chambers says it has made a difference in behind-doors settlements. Husbands are now recognising that older women, who were previously cut loose with no job prospects after a lifetime at home, deserve compensation.   

Henaghan says the disparity calculations are about as scientific as sticking your finger in the air to measure wind direction. In a case heading to the Supreme Court, the Family Court awarded $850,000, the High Court slashed that to $280,000 and the Court of Appeal bumped it back up to $470,000.

He favours a formula to value contributions such as childcare.

"It's never going to be a perfect world. If you're looking for the perfect answer all you do is create more and more litigation."

*Names changed

 - Stuff

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