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It may come as a surprise that how you deal with your assets, even before you are in a de facto relationship, can impact your property rights.
In Sutton v Bell [2021] NZCA 645, the Court of Appeal held that if a couple are “in contemplation” of a de facto relationship, a court may set aside a disposition of property (such as the transfer of assets to a trust) under section 44 of the Property (Relationships) Act 1976 (the Act).
Background
Mr Sutton and Ms Bell met in July 2003. They began a sexual relationship shortly afterwards.
At that time, Mr Sutton lived with two flatmates in a property that he owned in Point Chevalier, Auckland (Pt Chevalier Property). The Pt Chevalier Property was Mr Sutton’s former matrimonial home.
In early 2004, Ms Bell moved into the Pt Chevalier Property as a “flat mate”. Ms Bell had her own bedroom but slept in Mr Sutton’s bedroom.
At the end of 2004, Mr Sutton transferred the Pt Chevalier Property into a trust (Trust) with Ms Bell’s knowledge. In fact, Ms Bell suggested that Mr Sutton place the Pt Chevalier Property into a trust to ensure that it was considered separate property and not a “family home”.
The couple entered into a de facto relationship a month or two after the transfer of the Pt Chevalier Property to the Trust. For the purposes of the Act, a de facto relationship is a relationship between two people who are both aged over 18 years and living together as a couple.
The couple continued to live in the Pt Chevalier Property until they separated in 2012.
Ms Bell subsequently claimed a half interest in the Pt Chevalier Property on the basis that Mr Sutton had transferred the Pt Chevalier Property to the Trust in order to defeat her entitlements under the Act.
The Family Court ordered that the Pt Chevalier Property be transferred to Ms Bell and Mr Sutton as tenants in common in equal shares. The High Court dismissed Mr Sutton’s challenge to that decision and Mr Sutton appealed.
Court of Appeal Decision
The Court of Appeal (Court) was required to determine two main issues:
- Whether section 44 of the Act can apply to a disposition of Pt Chevalier Property made before a de facto relationship has commenced?
- If so, was the High Court correct to find that Mr Sutton had transferred the property to the Trust in order to defeat Ms Bell’s rights under the Act?
Can section 44 apply to dispositions made before a de facto relationship has commenced?
Mr Sutton argued that because his de facto relationship with Ms Bell had not commenced by November 2004, when the Pt Chevalier Property was transferred to the Trust, Ms Bell’s rights under the Act had not come into existence and he could therefore not have intended to avoid them.
The Court disagreed noting that for a claim to be available under section 44, at the time of the disposition the relationship must have reached a stage where there was a “mutual contemplation of beginning a qualifying relationship”. Therefore, the existence of a de facto relationship at the time of a disposition of property is not a necessary pre-condition for the availability of section 44.
So, what does “mutual contemplation of” mean?
The Court considered that, in most cases, the decision to live together creates a strong but rebuttable presumption that the parties have mutual contemplation of entering a de facto relationship. The following factors persuaded the Court that, at the time the Pt Chevalier Property was transferred to the Trust, Mr Sutton and Ms Bell were contemplating a de facto relationship. Mr Sutton and Mrs Bell were:
- In an exclusive relationship for 16 months.
- Living together for 8 of those months.
- Presenting as a couple to friends and family.
- Holidaying together.
- Visiting family for Christmas.
- Planning future holidays.
- Emailing each other about mundane life activities such as grocery shopping, purchasing firewood and cleaning the yard.
It did not matter that Mr Sutton and Ms Bell had kept separate bank accounts during 2004. The Court noted that they do not think that having joint accounts is necessary for a couple to be contemplating a de facto relationship.
Was the High Court correct to find that Mr Sutton had transferred the Pt Chevalier Property to the trust in order to defeat Ms Bell’s rights under the Act?
The Court focused on Mr Sutton’s knowledge as to the effect of transferring the Pt Chevalier Property to a trust would have on Ms Bell’s rights under the Act (i.e. Ms Bell would have no recourse to the Pt Chevalier Property) and concluded that knowledge of the consequences is sufficient to establish an intent to defeat a partner’s interest for the purposes of section 44. It did not matter that Ms Bell supported and encouraged the creation of the Trust and the transfer of the Pt Chevalier Property. Nor did it matter that relationship risk was not the sole driver for the transfer and Mr Sutton had other reasons for establishing the Trust.
Previously, a conscious desire to defeat your partner’s rights was required in order for section 44 to apply. So, this decision clearly establishes that threshold is much lower.
An argument was put forward that Ms Bell effectively contracted out of the Act when she suggested Mr Sutton dispose of the Pt Chevalier Property into a trust to protect it from any future claims she could make. However, the Act mandates that a person cannot waive their rights unless a formal contracting out agreement has been made. Therefore, although the disposition was made in good faith and with Ms Bell’s agreement, the disposition was still liable to a claim under section 44 of the Act.
The Court held that the High Court was correct to find that Mr Sutton transferred the Pt Chevalier Property to the Trust in order to defeat Ms Bell’s rights.
Leave to appeal this decision to the New Zealand Supreme Court has been granted.
Key Takeaways
This case clearly demonstrates that if you dispose of property and that disposition defeats your partner’s rights under the Act when you are contemplating a de facto relationship, your partner will have recourse to that property under the Act.
The transition from a “dating” relationship to a de facto one is an evolution and can be a real grey area. However, if you are considering moving in with your partner or your relationship is developing then it is important that you take formal steps to protect your separate property rights. The most important being entering into a contracting out agreement under section 21 of the Act, also known as a relationship property agreement. While these agreements can seem costly and awkward, they are the best way to protect your separate property.
If you have any questions about this article, please get in touch with our Private Wealth Team or your usual contact at Hesketh Henry.
Disclaimer: The information contained in this article is current at the date of publishing and is of a general nature. It should be used as a guide only and not as a substitute for obtaining legal advice. Specific legal advice should be sought where required.
