Section 9A of the Property (Property Relationships) Act 1976 (“the Act”) deals with the issue of what happens when separate property becomes relationship property. Under this section of the Act, if any increase in the value of separate property, or any income or gains derived from separate income were attributable to the application of relationship property, then the increase in value of the separate property or the income or gains are relationship property. For example, if someone were to use their wages to renovate their own rental property. Wages being relationship property has been used to increase the value of the rental property. The increase in value is relationship property.
However, section 9A(2) of the Act provides that the share of the relationship property is determined in accordance with the contribution of each spouse to the increase in value or the income or gains. For example, if the non-owner of the property were to financially contribute to the mortgage payments of a rental property, this would not necessarily entitle the non-owner to an equal division of the increase value of the rental property. In the case of Easton v Easton[1], the Court found that the increase in equity of a farm was not achieved by making mortgage repayments.
Yet, in another case, approximately $8,000 of relationship property was used to increase the value of the husband’s separate property by $167,000.[2] The wife was provided 50% of the increased value despite the increase being almost all due to inflation.
Courts have held that the attributing of relationship property does not need to be the sole cause of the increase in value so long as there is a sufficient causal relation. However, the causal relation must be more than trivial.
Of importance is when the relationship property is applied to separate property. For example, if someone were to not use relationship property towards their separate property for the first 10 years of the relationship and then to use relationship property for the last 3 years of the relationship, then only the increased value of the property occurring during the last 3 years of the relationship can be attributed to relationship property.
It is also important to note that the onus of proof is on the non-owning party to establish:
Relationship property was contributed to separate property; and
The contributions caused more than a trivial increase in value of the separate property.
In one case, the wife had renovated the husband’s separate farm home, landscaped the gardens, maintained the machinery, cleared weeds, assisted in planting a shelterbelt, fencing, and maintained financial records. Her contributions added approximately $10,000 to the $1.3 million increase to the market value of the farm. Being less than 1%, the court held that the contribution was trivial compared to inflation.
However, section 17 of the Act may be used where the applicant has failed to show that section 9A applies. Under s 17, compensation may be awarded to the non-owner of the separate property where they have “sustained” their partner’s separate property. “Sustenance” requires more than the normal daily performance of domestic chores. For example, farm work. Compensation under section 17 will not normally be as high as the awards under section 9A but can still be quite substantial.
How to keep your separate property separate
The best way to ensure that your separate property remains separate regardless of relationship property being attributed to the increase in the value of the separate property is to enter into an agreement contracting out of the Act (known as a pre-nup or contracting out agreement).
For more information please feel free to contact Hayley Boud on 07 839 7632 or hayley@ghlaw.co.nz
[1] Easton v Easton FC Palmerston North FP054/84/94, 19 October 1995.
[2] KRJ v RK [2013] NZFC 823, [2013] NZFLR 127