27 February 2014

Law Commission Report on prenuptial agreements — What does it all mean?


The Law Commission for England and Wales today published its report on Matrimonial Property, Needs and Agreements. The Commission set out its three main aims: first, to introduce a draft bill which will make qualifying nuptial agreements legally binding, so long as certain conditions and safeguards are met; second, to recommend that the Family Justice Council produces authoritative guidance on 'financial needs' so as to equip separating couples with the legal knowledge to reach agreement about finances and property without litigation; and third, to recommend that the Government commissions a long-term study to assess whether a non-statutory formula for spousal maintenance (such as the sort used in Canada) would work in England and Wales.

Currently, when exercising its statutory discretion to divide assets on divorce, the family courts of England and Wales can take into account a prenuptial agreement if it has been freely entered into by each party with a full appreciation of its implications  and if certain safeguards are adhered to.

The fundamental change recommended by the Report is that prenuptial and postnuptial agreements which satisfy prescribed criteria referred to below will be ‘qualifying nuptial agreements' (‘QNA's') and will be legally binding, thereby restricting the court's powers of asset distribution on divorce providing the financial needs of the parties and any children involved have been met. 

Qualifying Nuptial Agreements

The requirements are set out in the report:

- The agreement would need to:

  • be contractually valid and able to withstand challenge (for example from undue influence or misrepresentation).
  • be entered into as a Deed.
  • include a statement that both parties understood they were entering into a QNA.
  • be signed no less than 28 days before the wedding.
  • include a legal advice certificate, entered into by the parties' advisers, confirming that each party has received independent legal advice.

- The parties would need to have exchanged 'material information' about each other's financial circumstances.

Needs

The Report recommends that authoritative guidance be produced on the concept of financial ‘needs'. Currently, the assessment of ‘needs' in divorce cases varies not only geographically between family courts across the UK (as highlighted in the Law Commission's Report), but also between cases, depending on the background circumstances and lifestyle of the couple concerned. This recommendation represents a further step by the Law Commission to empower couples to manage their financial affairs on separation. The proposed five-year study for a non-statutory formula for spousal maintenance is another shift in this direction.

Matrimonial Property

The Law Commission has not recommended reform on the definition of non-matrimonial property, saying it would not be possible to reach a consensus on the approach, and recommending instead that parties should be able to enter into QNAs in order to agree how these different assets will be treated in the event of a divorce. For those without QNAs, there will remain scope for debate as to what constitutes ‘non-matrimonial' property.

Sharing

One issue that arises from early consideration of the Report is the way in which a QNA could be used to limit the court's ability to redistribute wealth generated during the marriage which is not required to meet the parties' needs and how this will affect the sharing principle which is enshrined in case law.

Who will benefit from the introduction of the QNAs?

  • Individuals who wish to protect assets they bring into the marriage or which they expect to inherit.
  • Those with trust interests.
  • Couples who marry later in life (perhaps for a second time) and who are more financially independent.
  • Parties who wish to protect assets for children from previous relationships.
  • Those who are financially secure following individual business enterprise and those who wish to protect future business interests.

Who might be disadvantaged?

  • The financially weaker spouse/civil partner who might be compromising their financial claims on divorce.

Foreign Agreements

Foreign marriage contracts will not automatically be treated as QNAs. For international couples moving to England, postnuptial agreements may be necessary to convert their foreign marital agreement into a QNA to benefit from the proposed legislation. Otherwise, the foreign agreement will be one of many factors to be considered in the court's discretionary exercise on division of assets on divorce.

The non-Court options

The Law Commission has further stressed the need for individuals to have autonomy in the family law arena by highlighting the non-Court options for the settlement of disputes, including mediation, collaborative law and arbitration. The family law team at Withers has extensive expertise in all of these areas.

Conclusion

If legislation is enacted, the answer to the frequently asked question “Are prenuptial agreements binding?” will become a qualified”Yes”, (as long as legal formalities are met and needs are catered for). This will enable some couples to ring-fence assets they have brought into the marriage, such as inherited property or pre-existing business interests and to consider how to deal with assets built up during the marriage.

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