The Contracting-Out Timebomb Every Couple Needs to Know About
Background
Here’s how the facts in the case played out (with names redacted to protect privacy):
“John” (we’ll say) and his long-term de facto partner “Mary” entered into a contracting-out agreement on 6 June 2002. That agreement was made under section 21 of the PRA, and defined which assets were “separate property” and which were “relationship property”. Among other things, it granted Mary a lifetime right to occupy the home they owned jointly (as tenants in common) on John’s eventual death or their separation.
John died on 18 March 2016 without leaving a will. Mary was appointed administrator of his estate. John also had two adult children from a prior relationship.
Mary elected Option B under section 61 of the PRA. That means she declined to apply for a division of relationship property under the PRA and instead sought her entitlement under the intestacy and will rules (i.e., from the Administration Act).
The children challenged Mary’s distributions on two principal grounds:
Because of the contracting-out agreement, Mary should not be able to claim the intestacy entitlements (they argued the agreement excluded that).
Because Mary elected Option B, she should also be precluded from relying on the contracting-out agreement's entitlements.
Decision of the Court of Appeal
The Court of Appeal dismissed the children’s appeal. Key points:
A contracting-out agreement under s 21 of the PRA can determine how property is divided (or labelled separate vs relationship) on death or separation.
But that agreement does not automatically override the intestacy entitlements under the Administration Act unless it does so in clear, unambiguous wording. In this case, the agreement did not expressly exclude Mary’s intestacy rights.
The Court held that Mary could benefit from both the contracting-out agreement (the right to occupy the home for life and to claim certain separate property) and her statutory entitlement under the Administration Act on intestacy.
The choice of Option B did not mean that Mary was forced to rely solely on intestacy and exclude the agreement’s entitlements.
However, it is important to note that the case is now before the Supreme Court (which granted leave to appeal).
Key implications for estate planning and administration
This case has considerable implications for clients and their advisers:
Contracting-out agreements and wills must be aligned
If a couple executes a contracting-out agreement intending a specific outcome (for example, that on death partner A leaves everything to children and partner B only gets the home life-use right) but partner A dies without a will, then the intestacy rules may still apply unless the agreement itself (or a will) clearly stipulates otherwise.
In John and Mary’s case, John did not make a will that matched the contracting-out agreement's purpose. That misalignment allowed Mary to claim under both.
So: drafting only an agreement without reviewing or updating your will is risky.
The dividing line between “separate” and “relationship” property is not enough.
The agreement in the case properly defined separate property vs. relationship property and granted specific beneficial rights (lifetime occupancy).
But that didn’t extinguish intestacy rights because there were no express words excluding the partner’s entitlement under the Administration Act.
When drafting agreements, use precise language to exclude intestacy entitlements.
Option A vs Option B election under the PRA matters
Under the PRA, when one partner dies, the surviving partner must elect either Option A (apply for division under the PRA) or Option B (not apply, instead take entitlements under a will or intestacy).
In this case, Mary elected Option B, which allowed her to claim intestacy entitlements. The agreement and the election were compatible.
If a surviving partner chooses Option A, they might lose the intestacy route – but also might (depending on the facts) be able to apply for a PRA division. So the election must be made with advice.
Estate administration needs to take into account the agreement
The administrator must consider the terms of the contracting-out agreement (especially those that grant life-use rights or other entitlements) when distributing the estate.
In this case, the home (held as tenants in common) was sold in 2021; Mary continued to live in it rent-free pursuant to the agreement’s lifetime right.
For estates with children from prior relationships or multiple beneficiaries, a clear structure is essential.
Timing, review and updating matter
Agreements made very early (or not reviewed) may not reflect later changes in the relationship, property portfolio, children, businesses, etc.
The contracting-out agreement may cover current assets, but new acquisitions or changed circumstances may not be addressed. This case emphasises the need to revisit both agreements and wills.
Fictional “real life” example
Let’s say:
– Susan and Mark enter a de facto relationship. Susan already owns a business valued at $1.2 m, and Mark has his own modest home and superannuation savings.
– They sign a contracting-out agreement that declares Susan’s business as her separate property and their jointly purchased home as relationship property; the agreement also gives Mark a life-use right in the home and property on Susan’s death.
– Susan dies without a will; Mark elects Option B. Under the intestacy rules, Mark is entitled to the personal chattels, the “prescribed amount” (currently ~$155,000) and one-third of the residue (because Susan had adult children from a prior relationship).
If the contracting-out agreement does not expressly exclude Mark’s intestacy entitlements, then Mark may claim both the rights under the agreement and the intestacy entitlements—contrary to Susan’s likely intention (that her children inherit the business).
That gap can lead to unexpected outcomes and conflict with the children.
What you should do now
Review any contracting-out agreements you have in place: check whether they address death, intestacy, and the interplay with wills.
Ensure your will reflects the contracting-out agreement’s purpose: if you intend to leave certain assets to children, your will must state that and deal with any partner’s entitlement under intestacy or contract.
If you haven’t made a will, make one now. Dying intestate when you have a contracting-out agreement creates risk of unintended outcomes.
When your relationship, assets, children or property change (inheritance, business sale, new partner, step-children) revisit both agreement and estate plan.
If you are an administrator of an estate and there is a contracting-out agreement, ensure you understand how the agreement and intestacy rules interact (or how the will does) before distributing.
How Ross Holmes Virtual Lawyers can help
At Ross Holmes Virtual Lawyers Limited, we specialise in assisting clients with wills and estate planning. We can:
Draft or review your contracting-out (pre-nuptial) agreement to ensure it aligns with your estate-planning intent.
Review or prepare your will so that it works with your agreement and anticipates intestacy contingencies.
Guide you through the options under the PRA (Option A or Option B) and explain how that affects your partner’s rights.
Assist estates where a partner has died intestate and there was a contracting-out agreement in place — to reduce the risk of claims and ensure proper distribution.
Act now: If you have a contracting-out agreement, or you’re entering a new relationship and own property (especially if you bring children from an earlier relationship), get in touch with us. Let us ensure your plan works the way you expect.
👉 Contact us today at +64 9 415 0099 or reception@rossholmes.co.nz to arrange a review.
