What happens to rural property when relationships break down?

September 25 2017

What happens to rural property when relationships break down?

More to the point: what happens if your property is held in a trust? Trusts are arguably a New Zealand institution for ensuring property is passed on to specific beneficiaries, but the courts are continuing to challenge trusts as a way to protect assets against a relationship break down. Here’s how recent case law is changing the way courts look at settling relationship break downs. 

Nuptial settlements: Clayton vs Clayton

On many New Zealand farms, it’s common for a trust to own several homes and for the family members to live in those properties with their partners and children. In many cases, especially with older farming operations, the parents or grandparents have already settled the trust. Until now, nobody has considered the idea that these homes could be an issue in a relationship break down.

The Supreme Court agreed with previous judgements which defined a nuptial settlement as “any arrangement that makes some form of continuing provision for both or either of the parties to a marriage in their capacity as spouses, with or without provision for their children.”

The judicial reasoning in this case clearly demonstrates the changing legal landscape with regards to trusts. The comments made about ‘nuptial settlements’ and Section 182 of the Family Proceedings Act 1980 are particularly interesting. S182 of the Family Proceedings Act provides, amongst other things, the following:

“… the Family Court may enquire into the existence of any agreement between the parties to the marriage or civil union for the payment of maintenance or relating to the property of the parties or either of them or any anti nuptial or post nuptial settlement made on the parties [our underline] and may make such orders with reference to the application of the whole or any part of any property settled or the variation of the terms of any such agreement or settlement either for the benefit of the children of the marriage or civil union or of the parties to the marriage or civil union or either of them, as the courts then think fit.”

The court has previously only made orders in relation to trusts where a farmer marries and transfers the farm to a family trust where the husband, wife and children are named beneficiaries. For the purposes of Section 182, that would be seen as a nuptial settlement if there was a marriage break-up.

Pushing the boundaries: The Kidd case

The Kidd v Van Den Brink case shows us the courts could be prepared to go further. The Hilversum Trust was settled in 1990, with the beneficiaries named as Mr & Mrs Van Den Brink Senior and children, and any spouse of any of their children. In 1998, their son Steven began living with Ms Kidd. Later, they married and had a child. The Hilversum Trust provided a family home, paid the outgoings, provided furnishings and assisted in the provision of a business loan for Steven and his wife. The couple broke up in 2006. Ms Kidd applied under Section 182 to seek provision from the Hilversum Trust based on the ‘settlement’ made on her and Steven during their marriage, i.e. the provision of the house, loan and so forth.

Ms Kidd was unsuccessful, but the court gave leave to appeal. The parties settled, so the appeal was never heard. However, when considering the reasoning in the Clayton case, she may have been successful. 

In this case, a couple and their children were contributing nothing while living in a house provided by an established, settled trust. It’s unlikely the court would have made orders affecting the assets held by the Hilversum Trust, but rural lawyers and trust lawyers anticipate the possibility that the courts will examine these situations in the future, perhaps making some type of order to provide accommodation for  Ms Kidd, so she continued to receive the same benefits she’d had as part of the marriage.

What should trustees do to manage these situations?

Due to the nature and setup of many farming operations, these kinds of situations are reasonably common in the rural community. If you’re a trustee of a farm, it’s worth considering how complex and challenging a relationship breakup would be in your situation. 

Relationship property agreements are often used to protect assets in marriages. However, as the Kidd case shows, the assets in question aren’t and never have been owned by parties in the RPA. A third party, such as a parents’ trust, can’t be bound by an RPA.

An alternative might be to consider drawing up a contract similar to a commercial arrangement. The couple could live in the house for a fixed term with the right to renew, if they pay the outgoings, look after maintenance and do a certain amount of work around the farm.

Although this is a common situation, everyone has unique circumstances, so there is no one-size-fits-all solution. If you have any questions about your situation, contact our rural lawyers for some sound advice.

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