In June 2023, the Supreme Court of New Zealand released a long-awaited decision in the case of Sutton v Bell.
Executive summary
The effect of the decision in Sutton v Bell is that it has now become easier to bust assets out of a trust after a relationship ends.
The Court ruled that s44 of the Property (Relationships) Act 1979 (Act), which allows a court to set aside dispositions of property to a trust (among other things), can apply to dispositions of property made before the de-facto relationship, marriage or civil union in question even commenced.
For example, you may consider yourself a single person and you decide to put your house into a trust to protect it from becoming “relationship property” under the Act and subject to the Act’s presumption of equal sharing. However, if you are seeing someone at the time you make the disposition and that develops into a de-facto or spousal relationship, then your house is at risk of being clawed back out of the trust by the courts and divided 50:50.
Help! I don’t want to read this whole article, just tell me what to do!
You have two fairly safe options:[1]
- Settle your assets on a trust when you are not seeing anybody in any capacity whatsoever. Eg, you could become a nun, you are so single. You are not on dating apps. You possibly live with your parents and still share a room with a sibling; or
- If you are with someone, have a chat about contracting out of the Act. It is not designed for everyone. A lot of people do not like the idea of dividing their house and chattels with a partner they have been with for 3 years. If you are on the same page, you will each need to see your friendly neighbourhood lawyer. If the relationship outgrows this phase and you are all-in (think kids, a dog, their family likes you better than them etc) then pop back to the lawyers and get the agreement varied or revoked (via a one-page deed) to suit the next phase of your relationship. Yes, this costs money, but so does giving half your house away to someone whose phone number you don’t know off by heart yet.
For those who want all the deets…
Facts of the Case
Mr Sutton and Ms Bell met in July 2003. Mr Sutton had separated from his former wife some months before and was living in the former matrimonial home (Property) with two flatmates. Mr Sutton and Ms Bell began a relationship shortly after meeting, she moved into the Property in about February 2004 and they had two children during a de-facto relationship that lasted 7.5 years. Mr Sutton, at Ms Bell’s urging and pursuant to legal advice, put the Property into a trust on 29 November 2004. The transfer happened prior to the couple commencing a “de-facto relationship” as defined by section 2D of the Act.
The law: Section 44 of the Act
After separation, Ms Bell went to Court to bust the Property out of Mr Sutton’s trust under section 44 of the Act so she could make a claim to half of it, as the family home.
Section 44 of the Act states (in part) that:
“Where the …Court is satisfied that any disposition of property [such as settling property on a trust] has been made… in the interests of any person in order to defeat the claim or rights of any person (party B) under this Act, the court may make an order [which may include transferring the property to any person the court directs or the payment of money].
Issues considered by the Supreme Court
The parties and their lawyers got to spend lots of time debating the meaning of s44, as their case went through the Family Court, High Court, Court of Appeal and Supreme Court. (That contracting out agreement isn’t looking so expensive now, is it?)
The Supreme Court granted Mr Sutton leave to appeal against the Court of Appeal’s decision, for the purpose of considering three issues:
- Can s44 of the Act apply to the disposition of property made prior to the commencement of a de facto relationship? The Court found that the answer to this is yes.
- If so, at what point does s44 apply to a disposition made before the commencement of a de facto relationship? The court’s answer is under the heading “The rule in Sutton v Bell” below.
- If s44 applies, was the disposition by Mr Sutton of the Auckland property to the trustees made “in order to defeat the claim or rights” of Ms Bell? The Supreme Court held that the mere fact that Mr Sutton “must have known” that the disposition of the Property into a trust would have the effect of defeating Ms Bell’s claim or rights to the Property under the Act meant that the Court could infer he had an intent to defeat those rights. It didn’t matter that Mr Sutton had other reasons for putting the property in trust or that Ms Bell initially encouraged Mr Sutton to make the disposition.
The rule in Sutton v Bell
Picking up issue 2 above, how are we to know when we have reached the point in a casual relationship whereby s44 applies? The honest answer, it is impossible. But here is the legal / Supreme Court’s answer:
“For a disposition of property to have been made in order to defeat the claim or rights of party B, there must be sufficient certainty that party B will have a claim or rights to justify the application of s44(1) to the disposition. So, if the disposition is made in circumstances where the parties are in a romantic relationship and/or are living together but do not have a clear and present intention to become parties to a de facto relationship, then we do not consider that it would be right to infer an intention to defeat a claim or rights that may, or may not, arise in the future, depending on how the relationship between the parties develops.”
So, unless you and your casual partner(s) record your intentions for the relationship/ hang out/ friends with benefits situation you have going on and dating and signing them, it is going to be pretty difficult for a lawyer to advise you, perhaps years later, about whether or not your disposition of property during that time could be set aside under s44 of the Act. Even if you did have your intentions recorded in writing, circumstances at the time may indicate a different view. For example, the parties may be in a sexual relationship and intend nothing more, however that does not preclude a baby from appearing on the scene. The care and support of children is one of the circumstances that is relevant to determining whether parties are in a de-facto relationship, pursuant to section 2D of the Act.
The parties to an informal relationship may not even share the same intention for their future. For example, one may intend that they will stay together long term, while the other may be making plans to separate. The parties’ intentions, or plans for the future of the relationship, may also change from day to day.
What to do if you can’t trust your trust?
If you are not in any kind of relationship at all, it seems, at this stage, that your assets can be settled on a trust without being clawed out under s44. This would include people who have recently divided their assets with a former partner and are looking for their assets to be protected from being divided further in future.
However, if you are in any kind of relationship at all, I would urge you to act with caution. If you have met someone who you are possibly going to stay with long enough to become de-facto partners or spouses, it is now arguably already too late to settle your assets on a trust to prevent them from becoming relationship property. So, what do you do if you can’t trust a trust to protect your assets?
Any two persons in contemplation of entering into a marriage, civil union or de facto relationship may contract out of the provisions of the Act and make any agreement they think fit with respect to the status, ownership and division of property (including future property) under s21 of the Act. They each need to obtain independent legal advice before signing the agreement. I’ll leave the last word to the Supreme Court: “The situation would be different if Ms Bell had entered into a contracting out agreement that complied with s21F (including the requirements for parties to be given legal advice). But that is not what happened in this case.”
If you require legal advice to contract out of the Property (Relationships) Act 1979 or to navigate a relationship property dispute, please contact:
Tarsha Makgill Tarsha.Makgill@lewislawyers.co.nz or Dayna Dustan Dayna.Dustan@lewislawyers.co.nz at Lewis Lawyers.
[1] Nothing is 100% litigation-proof, sorry.
