Item of Interest – A new section 44C, to be or not to be? – Reforming the Property (Relationships) Act 1976 (PRA).
The Law Commission began reviewing New Zealand’s relationship property legislation in 2016 and in October 2017, published an issues paper inviting public feedback entitled Dividing Relationship Property – Time for Change? Te mātatoha rawa tokorau – Kua eke te wā? Based on submissions that have been made so far and a consultation process, the Law Commission has outlined recommended reforms in its newly released paper: Review of the Property (Relationships) Act 1976: Preferred Approach: Te Arotake i te Property (Relationships) Act 1976: He Aronga i Mariu ai (2018). In a concurrently published Frequently Asked Questions document, which is also available on the website, the Law Commission has set out a summary of the key points from the 2018 ‘preferred approach’ paper.
In the FAQ document the Law Commission explains the evolved social context within which the recommendations have been considered necessary. We are reminded that although important changes were made to the PRA in 2001, including of course the extension of the law to de facto couples, the fundamentals of the law have remained the same since the Act’s enactment 42 years ago. The FAQ paper sets out those factors relevant to a contemporary consideration of relationships in contrast to those that were representative of relationships in the 1970s. It is stated that in the 1970s the paradigm relationship involved a marriage between a man and a woman, in which children were raised and wealth was accumulated over time. Now, fewer people are marrying and more people are living in de facto relationships. More relationships end in separation, and re-partnering is more common. The FAQ document further reports that the Law Commission has also found that public attitudes have shifted. A recent survey of public attitudes and values finding that, for some matters, New Zealanders have expectations about relationship property division that are different to the current law. In summary the Law Commission concludes that the PRA needs to change so that property sharing is appropriate for the changing social context and reflects most New Zealanders’ expectations of fairness.
Some 71 proposals are included therefore in the 2018 ‘preferred approach’ paper which runs to 258 pages. As aforementioned, the FAQ document outlines seven key proposals from these proposed reforms being that:
- The family home should no longer always be shared 50-50. Instead, if one partner owned the home before the relationship, only the increase in value during the relationship should be shared. Homes acquired during the relationship will still be shared equally.
- People who have children, have been together for 10 years or more, or who have built or sacrificed careers because of the relationship should be eligible for Family Income Sharing Arrangements or “FISAs”. Under a FISA, the partners would be required to share their combined income for a limited period after they separate, to ensure the economic advantages and disadvantages from the relationship are shared more fairly.
- A court should have greater powers to share trust property when a trust holds property that was produced, preserved or enhanced by the relationship.
- The rules should continue to apply to all marriages, civil unions and de facto relationships lasting three years, unless the partners enter into a contracting out agreement.
- Partners should still be entitled to share equally in all relationship property, subject to limited exceptions.
- Children’s best interests should be given greater priority under the PRA. This includes giving the primary caregiver of children a default right to stay in the family home in the period immediately following separation.
- A range of measures to promote the just and efficient resolution of PRA matters and to address behaviour that causes delay and increases costs. This includes making sure partners properly disclose to each other all relevant information about their property, whether or not they go to court.
The proposal on the issue of trusts is of particular note. The current state of the law provides that the PRA applies only to property owned by the relevant partners. When a person validly places property on trust, they pass legal ownership to the trustees. As a result, trust property only falls under the PRA to the extent each partner is said to have a beneficial interest under the trust, and that interest constitutes “property” within the meaning of the PRA.
There are several existing remedies to access trust property at the end of a relationship if the trust frustrates the just division of property, although they each come with their own limitations. Such remedies include those under sections 44 and 44C of the PRA (which apply to dispositions of property), section 182 of the Family Proceedings Act 1980, as well as remedies in trust law (which may include invoking the High Court’s supervisory jurisdiction to ensure the trust is properly administered or claiming that the trust is a sham or invalid or that trust assets are subject to a constructive trust in the partners’ favour).
The Law Commission identifies a range of problems in the area of the PRA and trusts. The first problem identified is that the PRA does not ensure the just division of property held on trust. The 2018 paper states ‘because property held on trust generally falls outside the PRA, there is no requirement that trust property be divided at the end of the relationship. The remedies available under the PRA to access trust property at the end of a relationship are also of limited effect, either because they are hard to claim or give the court inadequate powers.’ Other identified problems with the current law include: the perceived inaccessibility and complexity of the law on what interests in a trust constitute property under the PRA, the limited remedies available under the PRA, the inconsistencies with the contracting out regime under the PRA and the effects on the integrity of trust law principles in circumstances of partners disregarding the trust on separation in dividing trust property and perhaps consequently disadvantaging child beneficiaries under the trust.
The Law Commission having taken into consideration the conclusions of the consultation to date present four possible options for reform in this area:
Option 1: Revise the PRA’s definition of “property” to include all beneficial interests in a trust. The focus of this option is on the partner’s beneficial interest under the trust. Any interest through which it is both likely and permissible that the partner will receive a distribution of the trust property would be “property” for the purposes of the PRA, and would be classified as either relationship property or separate property like any other item of property.
Option 2: Revise the PRA’s definition of “relationship property” to include some property held on trust. The focus of this option is on the character of the trust property. Trust property which is attributable to the relationship could be classified as relationship property if the court considers it just, having regard to a range of express considerations.
Option 3: Broaden section 44C. Under this option, section 44C would be amended so that any disposition of property that has the effect of defeating the claim or rights of one of the partners would be caught. The court’s powers would also be broadened, so that it could have the power to make compensatory orders from the trust’s capital.
Option 4: Create a new provision modelled on section 182 of the Family Proceedings Act. This option would bring an equivalent of section 182 of the Family Proceedings Act into the PRA alongside section 44C. It would apply to de facto relationships as well as marriages and civil unions.
The 2018 paper outlines the responses to each of the four options ascertained within the consultation process, prefacing this with the fact that that no clear preference for a particular option for reform emerged. It is suggested that this highlights the difficulty of devising a test for when property held on trust ought to be shared at the end of a relationship, a difficulty also evident from the range of jurisprudence on the issue.
The Law Commission has set out that their preferred approach is to extend section 44C to provide a comprehensive remedy that will give a court broad powers to respond to the various ways in which a trust might hold property that is produced, preserved or enhanced by the relationship, in order to effect a just division of the property under the PRA. The 2018 paper details that the objective of the remedy is to provide relief when a partner’s entitlement under the PRA has been frustrated by the operation of a trust structure, or when the trust property was preserved or enhanced by the relationship. This aligns with the general scheme of entitlements under the PRA, subject to a court’s discretion to consider factors that might suggest that the trust should be preserved, or that compensation should be less that what a partner’s full entitlement would have been, had the trust property been subject to the PRA. It is suggested that this approach, as opposed to creating a new category of relationship property as Option 1 above does, instead allows the court discretion to grant relief which it is asserted strikes a better balance between protecting partner’s entitlements under the PRA and the preservation of trusts.
The Law Commission further set out that in reaching their preferred approach they have been guided by the following principles for reform:
(a) The reform should enhance the PRA’s ability to provide a just division of property when property is held on trust;
(b) Not all trust property should be subject to the PRA. Any new provision needs to be able to distinguish between trust property that should and should not fall under the PRA;
(c) Any provision that makes trust property available to meet relationship property entitlements should interfere with the trust to the least extent possible;
(d) Any provision that makes trust property available to meet relationship property entitlements should be simple and lead to predictable outcomes as far as possible, while recognising that discretion may be required to minimise the risk of unintended consequences; and
(e) It is preferable that all remedies sit within the PRA.
In the light of a proposed new section 44C having a broader application which would provide a court with wider remedial powers the Law Commission has been clear that the court must still be satisfied that making an order for compensation is ‘just’, having regard to a number specified considerations. The specified considerations, which would have the aim of promoting consistency in the application of a new 44C are proposed as follows:
(a) If the claim relates to a disposition of property, the extent to which the partner’s claim or rights under any other provision of the PRA have been defeated by the disposition;
(b) If the claim relates to the preservation or enhancement of trust property, the extent to which the trust property has been sustained or enhanced by the application of relationship property or the actions of either partner;
(c) The date or dates on which property was disposed of to the trust, or the trust was preserved or enhanced by the application of relationship property or the actions of either partner;
(d) Whether the partners disposed of property to the trust, or preserved or enhanced the trust property with informed consent of both partners;
(e) Any benefits the partners received from the trust, including the value of any consideration given for any disposition of property to the trust or for the preservation or enhancement of trust property by the application of relationship property or the actions of either partner;
(f) Whether the trust is intended to meet the needs of any minor or dependent beneficiaries; and
(g) Any other relevant matter.
The specified factors leave the courts flexibility, with the aim of prioritising the interests of fairness at the cost of greater certainty for parties and practitioners. By retaining much of the structure and working of the current section 44C it is the position of the Law Commission that the established body of case law will continue to provide guidance on when and how the section ought to apply.
In an area of relationship property which is perceived as desperately needing reform, the question remains whether the proposals will result in the fairer outcome sought. The Law Commission’s final report to the Government will be published in 2019.
By Kate Jones