The Property (Relationships) Act 1976 (PRA) governs how property is divided between couples when their relationship ends.  The PRA aims to ensure a fair and equitable distribution of relationship property, acknowledging the contributions of both partners during the relationship.  Under the PRA, there's a presumption of equal sharing of relationship property, which includes assets like the family home, cars, and savings acquired during the relationship.  However, the PRA also allows couples to "contract out" of these default rules and create their own agreement about how their property will be divided.  This is called a "contracting out agreement" or a "section 21 agreement," referring to the relevant section of the PRA.   

Contracting out agreements can be helpful for couples who want more control over their property and prefer a division tailored to their specific situation.  But it's crucial that these agreements are fair to both partners.  To ensure this, the PRA includes a provision, Section 21J, that allows the court to set aside a contracting out agreement if it would cause "serious injustice."  This provision acts as a safety net against agreements that are significantly unbalanced or that take advantage of one partner's vulnerability.   

Grounds for Setting Aside an Agreement

The term "serious injustice" isn't strictly defined in the PRA, which gives the court flexibility to assess each case based on its unique circumstances.  However, the legislation does provide some guidance on the factors that the court must consider when determining whether an agreement is seriously unjust.  These factors include:  

• The provisions of the agreement: The court will examine the specific terms of the agreement and assess whether they are fair and reasonable in light of the parties' circumstances.  This includes considering the overall distribution of assets, any provisions for spousal maintenance, and any other clauses that may impact the parties' financial well-being.   

• The length of time since the agreement was made: The longer it's been since the agreement was signed, the more likely it is that things have changed, potentially making the agreement unfair or unreasonable.  For instance, if one partner has experienced a significant decline in their health or financial situation since the agreement was made, the court may be more inclined to set it aside.   

• Whether the agreement was unfair or unreasonable at the time it was made: Even if circumstances haven't changed significantly since the agreement was signed, the court may still set it aside if it was unfair or unreasonable in the first place.  This could be due to factors such as one partner having significantly more bargaining power than the other, or one partner not having a full understanding of the implications of the agreement.   

• Whether the agreement has become unfair or unreasonable in light of any changes in circumstances: As mentioned earlier, changes in circumstances since the agreement was signed can be a key factor in determining whether it is seriously unjust.  This could include changes in the parties' health, financial situation, or the value of their assets.   

• The fact that the parties wished to achieve certainty by entering into the agreement: The court will recognize that the parties entered into the agreement with the intention of achieving certainty regarding the division of their property.  However, this factor alone will not prevent the court from setting aside the agreement if it would cause serious injustice.   

• Any other matters that the court considers relevant: The court has discretion to consider any other factors that it deems relevant to the assessment of serious injustice.  This could include factors such as the parties' contributions to the relationship, their respective needs and resources, and the impact of the agreement on any children of the relationship.   

Case Study: Tracey v Tracey (High Court - December 2024)

The recent case of Tracey v Tracey NZHC 3960 provides a compelling illustration of how the court approaches setting aside contracting out agreements under Section 21J of the PRA.  In this case, the couple, Mr. and Mrs. Tracey, had been in a relationship for 29 years, including 27 years of marriage.  They entered into a contracting out agreement in 2006, 14 years into their relationship.  The agreement stipulated that each party would keep the value of their separate property as it was at the start of their relationship, and any increase in the value of that separate property would also remain separate.  Any other property acquired during the relationship would be divided 95/5 in favor of Mr. Tracey.   

At the time the agreement was signed, Mr. Tracey's separate property was valued at approximately $1.4 million, while Mrs. Tracey's separate property was valued at approximately $131,000.  The agreement provided no mechanism for Mrs. Tracey to share in the value of the family home, which was considered Mr. Tracey's separate property.  The agreement also did not recognize Mrs. Tracey's non-financial contributions to the relationship, such as caring for the family home and supporting Mr. Tracey in his business ventures.   

The court found that the agreement was unfair and unreasonable, as it failed to adequately recognize Mrs. Tracey's contributions to the relationship and would leave her with very limited assets after a long-term marriage.  The court also noted that the agreement had become more unfair over time, as Mrs. Tracey's health had deteriorated, and she had closed her business.  In addition, the value of Mr. Tracey's separate property, primarily the family farm, had increased significantly since the agreement was signed.   

In light of these factors, the court concluded that giving effect to the agreement would cause serious injustice to Mrs. Tracey.  The court emphasized that while the parties' desire for certainty is a relevant consideration, it cannot outweigh the need for fairness and equity in the division of relationship property.   

Factors Leading to Setting Aside the Agreement

In the Tracey v Tracey case, the judge took into account several key factors in deciding to set aside the agreement:

• Disparity of outcome: The agreement resulted in a significant disparity in the division of property, heavily favoring Mr. Tracey.  After a 29-year relationship, this disparity was deemed to be a dominant consideration in causing serious injustice to Mrs. Tracey.   

• Lack of recognition of contributions: The agreement failed to recognize Mrs. Tracey's contributions to the relationship, both financial and non-financial.  This included her contributions to the family home, which significantly increased in value during the relationship.   

• Changes in circumstances: The agreement had become more unfair and unreasonable over time due to changes in Mrs. Tracey's circumstances.  This included the deterioration of her health, the closure of her business, and the lapse of a life insurance policy that was considered her separate property.   

• Unfairness and unreasonableness: The agreement was deemed unfair and unreasonable from the outset, as it deprived Mrs. Tracey of almost all her substantive rights without adequate compensation.  This unfairness and unreasonableness had compounded over time.   

Conclusion

The Tracey v Tracey case underscores the importance of fairness and equity in contracting out agreements in New Zealand.  It demonstrates that while these agreements can be a valuable tool for couples seeking to manage their property, they are not immune to scrutiny by the court.  If an agreement is found to be seriously unjust, the court will not hesitate to set it aside, even if it means overriding the parties' initial intentions.   

This case sends a clear message that the court will carefully consider the terms of such agreements and will intervene when necessary to protect the interests of both parties.  It also highlights the importance of seekingindependent legaladvice before entering into a contracting out agreement, to ensure that the agreement is fair and reasonable and that both parties fully understand its implications.   

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