The team at Schnauer & Co's have put together a resource toolkit to highlight some of the common misconceptions that some first home buyers have and provide you with tips on how to avoid some easy mistakes when buying your first home. Our expert tips will be presented over six easy to read articles, and they are all designed to help you achieve your goal of homeownership in NZ.
In the first 5 parts of the series, we discussed the solicitor approval condition, the process to follow when you are not able to satisfy conditions in the agreement for sale and purchase, the differences between a loan from parents vs a gift from parents, purchasing a property at auction, and the importance of a will. In this Part 6 of the series, we talk about COAs or a Property Sharing Agreement and why they are an important document to have, especially for first home buyers.
Do I need a Contracting out Agreement or a Property Sharing Agreement?
Once a relationship has been in place for 3 years, the Property (Relationships) Act 1976 (“Act”) requires property to be equally divided, despite each party’s contribution.
The correct terminology for what most couples require when purchasing a property with an unequal financial contribution is a contracting out agreement (“COA”) which you can sign before or during your relationship, but the later you leave it, the more difficult it can be to reach an agreement. A COA allows the parties to determine how assets will be divided in the event the relationship ends.
We recommend that you sign a COA at the earliest possible opportunity to ensure that your separate contributions are adequately protected and each of you will know where you stand in the future. A separation or relationship property agreement (“RPA”) is what is entered into when a couple decide to separate and they want to document the agreement made between them to divide their relationship assets.
Generally, COAs are entered into when people are seeking to retain ownership of existing property, say when one partner has a substantially greater amount of property than the other, or some property is very special to them and they may need to pass it down through the family. These are also particularly common when couples have re-married and have children from other relationships who they wish to protect their assets for before entering into a new relationship. A COA allows couples to contract out of the Act and the general principles of equal division, and allows them to negotiate the distribution of assets in a way that is better suited to their particular circumstances. These are now commonly required when gifts are given to children or children are set to have an inheritance but it is understood that this will not be obtained until the condition of the inheritance has been met (for example, upon the child entering into a COA with their spouse or partner). Nowadays, with parents often needing to help their children buy their first home, it is fairly common for us to prepare COAs before settlement of the property to protect everyone’s interest, especially when there is a gift involved.
The Act applies to:- Married couples, regardless of how long they have been married; and
- De facto (including same sex) couples if your relationship has lasted at least 3 years. The Act only applies to shorter de facto relationships in special circumstances.
It is however important to think about how the Act may affect you now in advance while your de facto relationship is steady rather than waiting until you have reached the 3 year mark. Some clients, unsurprisingly, have no idea about the Act and often think that if the property will be in their own/sole name and if they are the only one servicing a bank mortgage registered on the title, that the Courts will obviously see that asset is theirs. Unfortunately, it is not as simple as that. Also, it is important to remember that the Court considers each case based on it’s own circumstances and not just that general rule.
Clients often tell us that they don’t need one as they have only recently started living together and “it hasn’t been 3 years yet”. They refer to that generic 3 year rule but as recommended earlier, it is best to attend to this matter as soon as possible and especially when purchasing a property together otherwise it simply gets forgotten until it is too late. We acknowledge that it can be a difficult subject to broach, but the alternative (equal sharing) can be even less palatable if you are the spouse or partner with the greater amount of assets at stake.
We often have siblings or groups of friends purchasing a property together and we recommend that they enter into a property sharing agreement (“PSA”) to protect all of their interests.
In simple terms, a PSA is a legal document that outlines how two or more people will share the ownership and use of a property. It is commonly used when two or more individuals want to buy a property together but do not want to be fully responsible for the entire property on their own. The agreement specifies how the property will be shared, including details such as the percentage of ownership each person has, how expenses like mortgage payments and maintenance costs will be divided, and how decisions regarding the property will be made. It also addresses what happens if one of the co-owners wants to sell their share or if a dispute arises between the owners
The goal of a PSA is to provide a clear understanding of everyone's rights and responsibilities regarding the property. It helps avoid conflicts and ensures that each coowner's interests are protected. A PSA costs approximately $2,000 plus GST (depending on what is involved and how complex the arrangement is). Usually, we act for one purchaser and the other purchaser(s) would need to seek independent legal advice. Generally, the costs for the other lawyer to review the agreement that we have prepared and give their client(s) advice on it is in the vicinity of $350 plus GST. In the grand scheme of things, this is a small cost for peace of mind and this can usually be covered by any bank contribution that you may be receiving for your new lending.
The Property Team at Schnauer and Co are always available to help first home buyers with any property related questions.
For more guidance on producing a COA, contact:
Alison Dymond
Senior Associate
phone: 09 485 5803
