Untangling relationship property easier with prenup

Undertaking a business venture often involves developing a relationship with a business colleague which is akin to a marriage.

Each party brings different (but not necessarily equal) contributions to the venture with the idea that they work together to achieve a shared purpose. New parties to a venture may operate in partnership or adopt a company structure as a well-recognised, flexible vehicle to operate a business and to govern the relationship.

Well-advised parties will always enter into an agreement which sets out some of the key principles in which they will conduct the business, such as how they will deal with disagreements, incapacity, death or one party exiting the business. Where the relationship breaks down, a partnership or shareholders agreement will provide a binding pre-agreed framework which may still require some negotiation, but should reduce the cost of establishing the conditions on which the exiting party can leave.

Business owners also need to consider their private relationships and how these may impact their business in the event that they fail. Shares in a company or an ownership stake in a business will be relationship property unless there has been a prior agreement to the contrary which has been executed in accordance with the Property (Relationships) Act. These agreements are known as contracting out agreements, or colloquially, a ‘‘prenup’’.

The more complex your affairs, whether they be personal or business, the more important it is to enter into an agreement when relations are good to define each party's expectation of how property will be dealt with when things aren't so good. In the absence of an agreement between parties to a relationship, we are dependent on the law, which is a combination of statute and case law, to provide clarity.

One recent High Court case involving a dispute over a property which had been used for a farming business demonstrates how the law can struggle to adapt to changing social norms with respect to relationships in the absence of an agreement. The case involved the first consideration by the New Zealand courts of the property implications of a polyamorous relationship.

Two of the parties to the relationship were legally married as husband and wife in 1993. Six years later, the wife (Lilach) met Fiona. Three years later Lilach, her husband Brett and Fiona formed a polyamorous relationship.

They moved on to a farm property in Kumeu which was purchased in Fiona's name for $533,000. Fiona paid the deposit of $40,000. Fiona, Lilach and Brett lived together at the Kumeu property for the next 15 years. Their polyamorous relationship continued and for the most part they shared the same bed. Fiona practised as a vet, Brett established a paintball business on the property and Brett and Lilach had a lawn-mowing business.

Lilach also practised as an artist. All three contributed to the household and to activities which occurred on the property including maintenance and helping each other with their respective businesses.

At certain times, the parties also had secondary relationships with other individuals which were either between two parties or more than two parties and at least one of these relationships appears to have lasted for three years.

However, the relationship between Fiona, Lilach and Brett was close enough that there was an understanding that the relationship between the three of them was the main relationship evidenced by the exchange of rings.

In 2017, Lilach separated from Brett and Fiona, and Brett and Fiona subsequently separated from each other the following year. Fiona remained living at the Kumeu property. By the time the relationship ended, the Kumeu farm had a QV of $2,175,000.

Lilach initiated proceedings in the Family Court seeking orders determining their respective shares in relationship property and the matter was referred to the High Court to determine jurisdiction.

It was clear that the parties could not bring a proceeding under the Property (Relationships) Act based on a polyamorous relationship per se. The Act does not accommodate a three-way relationship.

Lilach and Brett argued that the relationship between the three of them was a series of contemporaneous relationships. However, the court analysed relationships of marriage, civil union and de-facto relationships and found that none of them fitted the scenario of three parties in a relationship. The court found it would be unworkable to stretch the legislation to fit this case.

Ultimately, Fiona was successful in rejecting the claims to the farm in this case, although the judge noted that the issues between the parties could be addressed through the law of equity rather than under the Property (Relationships) Act. This would address their relative contributions to the farm property and other assets, including business assets, but would involve a whole new set of proceedings.

Had the parties entered into some form of contract to govern their respective contributions to the relationship, the businesses and the farm, and specifically to how any increase in value in those assets should be shared, they could have saved the costs of two, and potentially three or more, sets of court proceedings.

Due to the intertwined nature of their business undertakings and the location of them on the farm, this failure flowed through to their businesses as well and demonstrates the importance of having a holistic view to the structuring of both your business and personal assets.

This responsibility also rests with professional advisers who may have expertise in, for example, commercial law, but not in relationship property matters.

Getting the right advice and structure at the beginning of your personal and business relationships will generally be money well spent.

 - Sally Peart is a partner in Marks & Worth Lawyers and regularly advises clients on the structure of their business and personal affairs.


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