Splitting the Fruits of a Relationship

Proposed changes to the Property Relationships Act 1976 – will it be more fair?

Written by Denise Evans – Principal, Dispute Resolution

Imagine this. You are the owner of a million-dollar home in Auckland. You have worked hard to pay off the debt and are now debt free. You fall in love and your new partner moves in with you. You meet all your new partners living costs, purchase nice gifts and look forward to spending the rest of your life with this special person.  Four years on, your partner says, “it’s over.” Suddenly you are faced with the prospect of going into your golden years with a huge debt having paid out your partner half the value of the home you owned prior to the relationship. You may wish you had listened to your lawyer friend and had put the house into a trust or at least had a contracting out agreement.

The Law Commission is about to release its report on changes to the Property (Relationships) Act 1976 (“PRA”) following an extensive period of review and consultation. It is anticipated that the report will propose some radical changes and is focussed on establishing a regime where parties in a relationship can share the fruits of that relationship in a way that is simpler for people to manage and more fair.

A major change will possibly affect the family home, which if it is owned by one partner at the beginning of the relationship will remain that person’s separate property. Only any increase in value would become relationship property. The increase in value may only arise because of an increase in the property market and is not dependent on contribution made by either partner. This regime may work where property values are rising, however if property values fall, the reality is that even after a long-term relationship, the non-house owning partner will get nothing from the family home. The property-owning partner will retain the home albeit with diminished value.

The Family Court is already making bold decisions to address some of the perceived lack of fairness of the present PRA. Her Honour Justice Grice in Kidd v Russell approved the analysis of factors considered by the Family Court Judge when determining that a family home should not be divided equally following a relationship of 6 years.  In particular the facts that the relationship was a second time around relationship for both parties and that Ms Russell owned the family home at the time the relationship began were highlighted. This affirmation by the High Court means that the Family Court will be taking a more flexible approach particularly in respect of claims make under s 13 PRA for extraordinary circumstances.

The report will also propose a new measure to be known as the Family Income Sharing Agreement (FISA). Under the proposal where there is significant disparity between the income of the partners that disparity will be resolved through the application of a formula which will combine the incomes and then divide that total by 2. The result will be the income that both partners would be entitled to for a defined time period after the relationship ends. It is proposed that this time-period would in most cases be equal to half of the time duration of the relationship with a cap of up to 5 years. Its proposed that this provision could be extended to take account of the circumstances of the partners. The higher income earning partner will have to pay the lower income partner by monthly instalment and it is proposed that IRD would be used as a payment/enforcement mechanism.

The Court of Appeal in Scott v Williams referred to the work being done by the Law Commission. All five Judges in their respective decisions, discussed the “because of ” wording in section 15 of the PRA and expressed views that the approach suggested in  XvX  [1] had not achieved the anticipated result of providing a basis for settlements outside of the Court. Arnold J set out his view of a formula which could be applied to deal with issues of economic disparity. [2]  Elias CJ said it was a matter for legislative reform however in approving the approach taken by Arnold J expressed the hope that his approach would help parties trying to resolve the issue in future.

It is also proposed that the needs of children will be considered more often having regard to NZ’s obligation under the UNROC.[3] There is provision already under s 26 of the PRA however the provisions seem to have been rarely considered at least in respect of matters that are resolved by the Court. Anecdotally it seems that parents have made arrangements taking into account the needs of children such as one parent living in the family home for an extended period whilst the children are school age or to meet some other family circumstance.

There is no doubt that there will be more extensive feedback and thought given to the proposed changes and if they are accepted by Government the process of amendment of the PRA will take time.

It is anticipated that the Law Commission report will also look at dispute resolution and encourage the use of cost effective alternatives to litigation. With the words of Justices Glazebrook, Arnold, Elias, William Young, O’Regan and Grice ringing in our ears, parties can already choose to resolve property matters in cost effective ways through mediation and arbitration - we do not have to wait for legislative change.

Already many separating couples chose mediation as a way to discuss their relationship property division. One of the biggest challenges for a mediator is knowing whether or not the parties are ready to mediate. You may think this relates to them being emotionally ready however an even bigger concern is about whether the parties have completed full disclosure of the assets that are to be divided. The PRA requires parties to identify assets, classify whether they are relationship property, separate property, assets to which a claim might be made on the basis of contribution or property that is owned by another entity such as a Trust or company to which a claim might be made. After all that, they need to establish the value of the property. If this all sounds complicated there is more, the mediator needs to be alert to the possibility of economic duress or power imbalance, and the impact of any agreement on third parties such as creditors. It is essential therefore that any party considering mediation as a way of resolving relationship property matters engages a credentialed mediator who has both training and experience. The parties also need quality legal advice.

Co-operation is essential where parties consider mediation. Nation J’s decision in Biggs v Biggs emphasises the need for professionals to work together to assist parties resolve property issues and the expectation on parties that they will disclose assets.  If the issue which is holding up a division of property is the valuation of company shares, then it is possible for the mediator to be appointed to hold a conference with the valuers to see whether they can reach agreement.

A more recent development is the availability of arbitration where the parties choose the person who will make the decision, determine the issue to be resolved and have control over the process. In many ways, arbitration is like having a private judge chosen by the parties, with the added benefit of saving you the time and cost of going to Court.

Although we will have to wait and see whether the proposed changes to the PRA will in fact create a more fair and transparent regime for dividing the fruits of a relationship, the opportunities created by private dispute resolution enable maximum flexibility and control by the parties of decisions they need to either make themselves or have made for them. There is some irony in that it needs some people to be prepared to take cases to Court for Judges to determine and in doing so create precedent and develop the law which people can then rely on in private dispute resolution. The question needs to be asked however about whether the cost of such development is fair to those who take cases to court.

About the author

Denise Evans is Principal, Dispute Resolution at FairWay. As part of this role, Denise provides Dispute Resolution leadership within FairWay and champions the use of Dispute Resolution services in New Zealand and internationally.

Denise has over 30 years’ experience as a lawyer, mediator and arbitrator, and she has vast experience in resolving commercial and family disputes. If you would like to get in touch with Denise, please contact her by email at denise.evans@fairwayresolution.com

 

 

[1]  X v X [Economic disparity] [2009] NZCA 399, [2010] 1 NZLR 601

[2] see Arnold J’s analysis at para 326

[3] For more information on how NZ meets its obligations to children generally see http://www.occ.org.nz/childrens-rights-and-advice/uncroc/