Question: My partner and I want to buy a townhouse when it goes to auction. I am due to receive a substantial inheritance shortly so I will provide the full deposit. I also earn more than my partner so will contribute a greater proportion towards the mortgage. How do I get a proper value for the townhouse? How do I protect myself in case our relationship goes south?
Answer: Buying a property is an exciting time in any relationship but it can feel complicated if you are contributing different amounts to the purchase. There are steps you can take to protect your inheritance if you and your partner separate in the future.
Valuations
If you are seeking a valuation of the townhouse prior to the auction you should ask the real estate agent who has listed the property. They may be able to provide an indication of what they expect the home to sell for. You can also ask other real estate agents who are familiar with the area. There are a number of online estimation tools such as homes.co.nz which will tell you what other townhouses in the area have sold for.
Contracting out agreement
When a couple separates after three years together the rules of the Property (Relationships) Act 1976 apply to the division of their relationship property. The Act usually requires all relationship property to be divided equally between the parties. The family home is relationship property no matter who bought the home or whose name is on the title. While an inheritance is generally considered to be your separate property, if it is used to purchase a joint home It is considered to be intermingled with relationship property.
Section 21 of the Act enables couples to contract out of these rules and enter into their own private agreement about how their property will be divided upon separation or death. This is commonly called a contracting out or prenuptial agreement. This agreement can be made at any stage of the relationship, but it is advisable to do so before the relationship has reached the three-year threshold.
By entering into a contracting out agreement with your partner you agree what would happen to the townhouse if you separate. If you have contributed different proportions to the purchase of the property, you may wish to divide the property according to those proportions if you separate. However, you may feel comfortable with your partner being entitled to a greater share of the property over time. It is up to the two of you to decide what you want to exclude from the relationship property pool and how the remaining property would be divided.
Considerations for a contracting out agreement
Don't rush
You may feel a lot of pressure to get a contracting out agreement in place if the auction is only days away. This type of agreement usually takes some time as it requires careful thought and detail. You both want to ensure that all assets and liabilities are listed and that you have thought about how the agreement will work.
Make sure the agreement is valid
A contracting out agreement must be in writing and signed by both parties. Before signing each party must receive independent legal advice. This means you each need to speak with your own lawyer. A lawyer must witness your signature and certify that they have explained the meaning and consequences of signing the agreement.
You can find a family lawyer who will help you draw up an agreement here - http://www.familylaw.org.nz/public/find-a-lawyer. Alternatively, Agreeable is a service that specialises in contracting out agreements and separation agreements. They provide you and your partner with a template agreement to complete and then match you with independent lawyers who will refine the agreement and provide advice to each of you.
Regularly review and revise the agreement
You need to revisit the agreement throughout your relationship to ensure it remains fair for both parties. The agreement should be updated when circumstances change, for example, if you have children.
It is important that any agreement reached is fair for each of you. A contracting out agreement can be set aside by the Court if giving effect to it would cause serious injustice to one party. If an agreement is very one-sided there is a greater risk that your partner could challenge it in Court.
Property sharing agreement
If either of you have a trust which will be the purchaser of the townhouse, you also need to enter into a property sharing agreement. This is because the Property (Relationships) Act 1976 does not apply to trust property. A property sharing agreement would be between the trust and other party and record the proportions to which each own the townhouse.
Summary
If you and your partner want to purchase a property but contribute different amounts the best way to protect yourself is a contracting out agreement. This will provide you and your partner with certainty about what will happen if you separate or one of you passes away. You need to speak with a lawyer who can provide advice based on your situation and design a solution that suits you best. Good luck at the auction!
This article was first published with the NZ Herald.
