What is a cohabitation agreement and why should I get one?

What are “financial agreements”, “binding financial agreements” or “BFAs”?

The terms “financial agreement”, “binding financial agreement” or “BFA” are often used loosely by lawyers and non-lawyers alike in reference to contractual agreements which parties may enter under the Family Law Act (1975). When using these terms, maybe one specific meaning is intended. However, there are various alternative agreements which may be entered under the Act.

In this article we look at one specific type of BFAs: “cohabitation agreements”.

Cohabitation agreements

A cohabitation agreement may be defined as a contract between two parties which makes provision about how to divide their assets if they separate in the future.

Parties to a cohabitation agreement are contracting out of the provisions under the Family Law Act which would otherwise give them rights and entitlements against each other for a property settlement. Instead, they wish for their contract to provide what are their rights and entitlements against each other.

A cohabitation agreement may cover all assets of the parties or some of their assets.

Pre-Nuptial Agreements and Other Cohabitation Agreements

A “pre-nuptial” agreement 1 is a type of cohabitation agreement which parties sign up to:

Before they marry;
In contemplation of their marriage
Addressing how, in the event of the breakdown of the marriage, their property is to be divided between them.

However, there are many other types of cohabitation agreements under the Family Law Act:

1) A cohabitation agreement signed up by parties:

a)      Before they commence a de facto relationship;
b)      In contemplation of the relationship;
c)      Addressing how, in the event of the breakdown of the marriage, their property is to be divided;

2) A cohabitation agreement by parties during their marriage;

3) A cohabitation agreement by parties during their de facto relationship.

Why enter into a cohabitation agreement?

There are many reasons why people enter into cohabitation agreements. We list below some of the reasons which parties sometimes advance.

Certainty and Clarity – One specific reason which seems to motivate all parties is to have certainty and clarity about their affairs and about the division of their assets if they separate in the future rather than being potentially subjected to the vagaries of a claim in court under the Family Law Act.

To protect assets and protect from debts introduced to the marriage or the relationship – The parties or one party may have significant assets and the agreement may provide for those assets to remain quarantined or separate from the relationship. The agreement may make similar provisions about debts.

To protect the farm/the family business – Sometimes the assets and finances of a party are closely linked or intermingled with his/her extended family as, for example, in the case of a family which owns a farm and wishes to keep it in the family. Another example is when a party is a co-owner with his /her parents and siblings of a family business. A cohabitation agreement may be a useful tool in those circumstances to quarantine the farm or business from a future family law claim.

Second Marriages – Frequently, the parties to a cohabitation agreement have been married before and have acquired assets of their own. They are committed to their new relationship but wish to protect their current assets from a future claim and to make provision for children from previous relationships.

Part of the motivation to enter into a cohabitation agreement in those circumstances sometimes is to ensure acceptance of the new relationship from their respective children.

What makes a good cohabitation agreement?

The best cohabitation agreement is one that fits the circumstances of the parties and their requirements.

Ideally, the agreement will be simple and direct.

Normally, parties wish to list:

Separate assets which each party already owns and which they wish to remain separate and not to intermingle it with the rest of the parties’ assets;
New separate assets – normally parties wish to have the flexibility to use their separate assets as security or collateral to acquire new assets or to sell separate assets and acquire new separate assets
Future inheritances

In relation to joint assets, there should normally be a clear provision in the cohabitation agreement to the effect that the entitlement each party has to assets in joint names will be proportionate to the title they acquired when the parties initially purchased their joint assets.[2]

In the event of separation, the agreement should have a clear process for the parties to divide their assets between them including:

to give each party the opportunity to buy the other party’s interest in joint property; or
otherwise, how the joint assets should be sold that the joint assets be sold and how the proceeds will divided under the agreement.

A cohabitation agreement need not be fair. However, it is important to reflect on the following extract from the decision of the High Court in Thorne v Kennedy [2017] HCA 49:

“…Of course, the nature of agreements of this type means that their terms will usually be more favourable, and sometimes much more favourable, for one party. However, despite the usual financial imbalance in agreements of that nature, it can be an indicium of undue influence if a pre-nuptial or post-nuptial agreement is signed despite being known to be grossly unreasonable even for agreements of this nature.” [3]

There is a balance and it is important, at the time of drafting these agreements that the parties and their solicitors be aware about the need not to make the agreement grossly unreasonable.

There are many uncertainties about the future. It is impossible to predict all possible vicissitudes of life. However, it is important to reflect about all likely future events and to address these between the parties and make appropriate provision in the cohabitation agreement including:

one party is likely to survive the other;
one or both parties may become unable to make decisions about their affairs at some stage before death;
the children of the party who lost capacity may wish to make decisions which affect the other party adversely;
should the cohabitation agreement make provision for the surviving party to have the right, say, to live in the other party’s property for life if he/she survives the other?

When should you enter into a cohabitation agreement?

As we mentioned above, parties may sign up to a cohabitation agreement before or during their marriage or de facto relationship.

One word of caution about the timing of a cohabitation agreement is not sign up when the wedding or the commencement of the relationship are imminent. There is a risk, otherwise, that the agreement may be successfully challenged in future if a court concludes that it was entered under pressure. [4]

Pitfalls and Challenges of a Cohabitation Agreement

My personal experience is that considerable effort is required to plan and draft a cohabitation agreement appropriately. There is no “one size fit all” or template that can be used in every case.

Since cohabitation agreements became recognised under the Family Law Act [5], there have been various notorious cases when courts declared cohabitation agreements void and set them aside.[6]

Many family law specialist lawyers to this day refuse to advise parties in relation to cohabitation agreements because of the risk that an agreement they drafted may not survive a future challenge.

Those solicitors who are still prepared to represent parties and assist them with their clients’ cohabitation agreements normally take substantial care in the drafting of the agreements and, after an agreement’s signature, keeping records in safe custody including a copy of the signed agreement, file notes and copy of a comprehensive written letter of advice to their clients. This information is normally kept in case that the solicitor may require it as evidence in a future court case disputing the validity of the cohabitation agreement.

More recently, it has become less common for courts to set aside cohabitation agreements. Still, it is very important of the lawyers and the parties to remain cautious about the agreement they wish to enter into.

Why Do Courts Set Aside Cohabitation Agreements?

There are various specific requirements for a cohabitation agreement to be valid which are listed in the Family Law Act. [7] The Family Law Act also lists various reasons why cohabitation agreements may be set aside. [8]

Sometimes, parties and their solicitors make basic mistakes when drafting or executing cohabitation agreements. Cut and paste jobs lead to incomprehensible clauses, and incomprehensible agreements when even the names of the parties change without warning from John and Jenny to David and Debbie.

Basic requirements, for example, that each solicitor be properly qualified in Australia to practice as a solicitor and provide independent legal advice are not followed. Certificates of legal advice are not properly completed or properly signed.

Clients sometimes turn up to a solicitor with a template they drafted seeking that the solicitor “witness” it.

Basic mistakes may be avoided if the original drafter of the agreement applies appropriate care and precision and the lawyers and the parties have the appropriate respect for the process required.

[1] https://elringtons.com.au/2011/03/prenuptial-agreement/

[2] Frequently, parties agree to a clause in the agreement that if they acquire real property jointly, they will own it as tenants in common (not joint tenants) and each party’s entitlement to the real property under the BFA will be equivalent to the share of title they have – 30%, 40% etc;

[3] Thorne v Kennedy [2017] HCA 49 (8 November 2017) at Paragraph 56;

[4] Thorne v Kennedy [2017] HCA 49 (8 November 2017) was a case where the Trial Judge declared a pre-nuptial agreement void and set it aside as she concluded that the husband applied undue influence on the wife to sign it. The Judge described, among other things: the wife’s “…emotional preparation for marriage, and the publicness of her upcoming marriage.” Significantly, the High Court sided with the Trial Judge decision and, in the process, overruled the Full Court of the Family Court which would have allowed the cohabitation agreement to stand;

[5] Family Law Amendment Act 2000 (which took effect from 27 December 2000);

[6] See Thorne v Kennedy [2017] HCA 49 (8 November 2017) referred to in (2) above; see also Wallace & Stelzer and Anor [2013] FamCAFC 199 (‘the pole dancer case’);

[7] See section 90G and section 90UJ of the Act;

[8] See section 90K and section 90UM.