Financial agreements – do they work?

By February 26, 2021March 31st, 2021No Comments

Why would you get a Financial agreement?                           

You’ve had a bad break up with your ex but life does go on – thankfully!  – and you’ve met the person of your dreams. You are worried that even though this feels like forever, if this relationship does end, what is going to happen to your hard earned property?

This could equally apply to someone who is never had a financial separation but has found themselves in a good financial position, entering into or being in a long-term relationship and wondering how it might all be divided if they were to separate.

There is really only one way to have a legal agreement in place that sets out how to deal with property in the event of a separation. It’s called a financial agreement; some still refer to it as a “pre nup”.

What is a financial agreement?

A financial agreement is a document that must be in writing and signed by both parties. It can be entered into at any stage of a relationship, even before a defacto relationship starts; and covers married, defacto couples and/or same sex couples. Both parties must have their own lawyer, who must sign a statement saying that they gave their client the required legal advice.

The Family Law Act says that if a financial agreement exists  – validly – then that sets out how property is to be divided and parties cannot come to the court for a decision.

When these financial agreements first became possible, they were heralded as THE water tight way to ensure a binding agreement. However, over the years there have been a multitude of cases in the court where these agreements have been overturned. This is because the agreement, in order to be binding, has very strict requirements as to content and form and if those requirements are not met, the agreement can be set aside. These agreements can also be set aside in other circumstances such as where there has been fraud; or one of the parties has acted in an “unconscionable” way. A good example of this is the well known and quite recent case involving a Russian bride who (the court found) felt forced to enter into the financial agreement just weeks before her wedding.  The agreement was set aside.

Another reason agreements are set aside is if since the making of the agreement, a material change in circumstances has occurred (being circumstances relating to the care, welfare and development of a child of the marriage or relationship); and, as a result of the change, the child or, the person who cares for the child will suffer hardship if the court does not set the agreement aside. There are a number of other grounds as well, where an agreement can be set aside.

But let’s say the agreement is watertight, what it does is dictate how property will be divided between you in the event of your separation. It takes away your right to go to the court for a Judge to decide what is a fair division of property. That is fine so long as the agreement is a good outcome to you at the time of separation. If the agreement is NOT favourable to you, you may be stuck with the outcome as set out in the agreement.

The challenge for Lawyers, in drafting these agreements before separation is what trying to “crystal ball gaze” as to what the future might hold for your client. The challenge is trying to cover all scenarios for a client, because who knows what might happen during the relationship and what your situation could be in the future; and particularly challenging if there is an intention to have children together. Over the years of a relationship partners make all sorts of contributions towards property, financial and non-financial, which would be taken into account by a court. Partners may also have different needs financially into the future, which a court also factors into any division of property; whereas these two considerations (contributions and future needs) may not be adequately reflected in the financial agreement you agreed to years earlier.

So is it right for you?

A financial agreement might be a good option. At the very least it does provide certainty and ideally reduces the stress of trying to sort out a division of property down the track.  Properly drafted, a financial agreement can give you the outcome you both agree is best for you. It is certainly a big decision and you should only get advice from a Lawyer who specialises in Family Law.