You’ve started seeing someone and it’s looking promising. It’s still early days, but you are starting to ask “those” questions – what next? Shall we take this further? Shall we try moving in together? And, following a just-released Supreme Court decision, you should probably add another question to the list – could you please waive your rights to any property I own?
This week, the Supreme Court has issued a cautionary decision that may give many romantically involved couples around the country cause for concern. As if starting a new relationship wasn’t fraught enough, the Court’s message is clear – if there is any chance the person you are dating might one day become your de facto partner, you would be well-advised to get legal advice on what to do with your assets as soon as possible.
We discuss this decision in the following article.
The relationship commences
Mr Sutton thought he had covered his bases well.
He had met Ms Bell in 2003.
Although they met then, ultimately the Court’s position was that the couple only entered into a de facto relationship (as defined under the Property (Relationships) Act 1976 (PRA)), sometime between December 2004 and January 2005.
When their relationship started, Mr Sutton already owned a home in Point Chevalier, Auckland, which he had received as part of a prior matrimonial breakup.
The trust is formed
In late November 2004 - before their de facto relationship started - Mr Sutton transferred the Point Chevalier property into a family trust of which he was a trustee. He did this following legal advice.
This had been done with Ms Bell’s full knowledge. He had even received email communications from Ms Bell nine months before, in which she encouraged him to do so. Her email said, “[t]hen no matter what happens – for the rest of your life, you have the [Auckland] property as your own and it can never be counted as “Relationship Property” and won’t ever be at risk of being divided again.”
A key point, however, was that Mr Sutton and Ms Bell had not “contracted out” of the equal sharing regime of the PRA in accordance with the requirements of s 21 of that Act, including the receipt of independent legal advice to each party.
The relationship ends
The relationship ended in September 2012, about nine years after the couple first met and after they had had two children together.
Ms Bell, together with the couple’s children, continued to live in the Point Chevalier property until January 2018.
Nearly five years after the couple’s relationship ended, in July 2017, Ms Bell claimed a half interest in the Point Chevalier property.
She claimed Mr Sutton had transferred the property to the trust in order to defeat her entitlements under the PRA. Ms Bell relied on section 44 of the PRA, which provides that the Court can set aside dispositions of property made in order to defeat the claim or rights of any person under the PRA.
The case worked its way through the Family Court, the High Court, the Court of Appeal, and, finally, the Supreme Court.
The parties’ arguments
Mr Sutton argued:
- He could not have acted in order to defeat an interest in property which at the relevant time did not exist.
- An interest did not, and could not, exist at the time of the disposition (the transfer of the property into a trust) because his de facto relationship with Ms Bell had not, by November 2004, commenced.
Ms Bell argued:
- It was not legally necessary for a de facto relationship to have begun at the time the property was transferred to the trust.
- Rather, a disposition “in anticipation” of a de facto relationship could still be caught by section 44 unless it followed a valid “contracting out” agreement under s 21 of the PRA.
Mr Sutton was unsuccessful in his arguments. Ms Bell was awarded a half share of the house.
Key points to take from this decision include:
- Section 44 of the PRA can still apply to dispositions even where a party in a relationship has no existing rights under the PRA at the time the other party makes the disposition. In other words, the Court effectively applied the laws of time travel and found that section 44 can be used to protect future rights that have not crystallised, but subsequently do.
- Unilateral dispositions of property by one party, at a time when, viewed objectively, there is already a clear and present intention of the parties to progress to a de facto relationship, will be vulnerable to attack where there has been no independent legal advice received by each party.
- Unilateral dispositions of property by one party, early into a romantic relationship, and without there being a clear and present intention of the parties at that point to progress to a de facto relationship, will be less vulnerable to attack under s 44.
- Intent to defeat the interests of the other person is not necessary – if the person knows that the disposition of property would have such an effect, that is enough.
- A s 21 PRA contracting out agreement is essential if the relationship looks set to develop into a de facto relationship, and there are assets that one of the parties does not want to share.
The main message from the Sutton v Bell decision is to make sure that you give clear and considered thought to relationship property implications early in a relationship, especially where parties are introducing assets.
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