Cohabitation Agreements and the new Family Law Act:Why you probably want a cohabitation agreement

In a previous post, “Why you DON’T Want a Cohabitation Agreement,” I summarized the law on the division of property between unmarried couples and how s. 120.1 of the Family Relations Act usually made cohabitation agreements a very, very bad idea when the purpose of the agreement was to protect property brought into a relationship. 

That’s all changed as a result of the enactment of the Family Law Act on 24 November 2011. Let me explain.

Property, unmarried couples and the Family Relations Act

Under the Family Relations Act, married spouses are presumed to have a one-half interest in everything that qualifies as a “family asset.” The definition of family asset is so broad, however, that almost everything a married couple has is a family asset whether they bought it after the marriage or brought it into the marriage; most of the time, a married spouse is entitled to half of everything regardless of when and how an asset was acquired.

This isn’t the case for unmarried couples because unmarried couples are expressly excluded from the parts of the Family Relations Act that deal with the division of family assets.

Unmarried couples have no shared interest in any assets except those that they own together. When only one person owns an asset, like the family home, for example, it presumptively remains that person’s sole property, no matter how long the couple lives together.

Unmarried couples, trust claims and unjust enrichment

Of course, after a couple has lived together for five, ten or twenty years, it can seem somewhat unfair that only one of them has an entitlement to the family home, or the family car, or a business or whatever. In a case like this, the person who doesn’t own an asset tries to establish an entitlement by proving the existence of an express trust or a resulting trust, or, more commonly, by proving that the person who owns the asset was unjustly enriched by something the non-owner contributed during the relationship.

All of these claims are difficult to prove, and, even when successful, rarely result in a property interest any where close to the one-half interest the parties would have had if they had been married.

As a result, someone who didn’t want to share the assets being brought into a relationship would simply get some legal advice about how to avoid express and resulting trusts, and make sure that the contributions of the other spouse were always compensated in someway in order to duck an unjust enrichment claim.

Unmarried couples, cohabitation agreements and the Family Relations Act

Despite this rather favourable legal circumstance, people often wanted cohabitation agreements before entering into a long-term, live-in relationship, mostly to address the division of property in the event the relationship ended. Normally, this would be a sensible course of action; wouldn’t it be easier not to have to worry about unintentionally creating a trust relationship or being inadvertently enriched? 

Not so. The problem here lay in a nasty little section of the Family Relations Act, s. 120.1. Under this section, if an unmarried couple made an agreement that dealt with property, the parts of the act that apply to the division of assets between married spouses applied to the unmarried couple making the agreement, and the cohabitation agreement was considered to be a marriage agreement.

This was very bad, for two reasons. First, s. 65(1) of the Family Relations Act expressly allows the court to vary marriage agreements it finds to be unfair. Second, the definition of “fairness” was the presumption of equal entitlement set out in s. 56 of the act which would otherwise have only applied to married spouses.

In a nutshell, as a result of s. 120.1, the standard of property division for married spouses applied to unmarried couples with cohabitation agreements, including certain presumptions about the division of property that would be far worse in effect than what the principles of trust law and unjust enrichment would have yielded in the absence of the cohabitation agreement.

Unmarried couples and the Family Law Act

Under the Family Law Act, unmarried couples that have cohabited for more than two years will have the same property rights as married spouses.

Under the new act, assets brought into a relationship and certain assets acquired afterwards, like court awards and inheritances, will be excluded from division between spouses. The assets that will be divided, and the presumptive division is an equal division, are the assets acquired after the relationship began as well as any increase in the value of the excluded assets.

From the point of view of the person who owns an asset, this is better than the law for married spouses under the Family Relations Act and better than the law for unmarried couples with a cohabitation agreement. However, there can still be some very significant consequences in sharing in the increase in value of an excluded asset — think of what has happened to the value of real estate in the lower mainland over the past 10 years, or the values of stock in Apple, crude oil and your Gretzky rookie card over the same period.

Despite the coming changes in the law, some couples will still want a cohabitation agreement, specifically couples who are in long-term unmarried relationships right now and couples with assets who expect to be in long-term unmarried relationships.

Cohabitation agreements, the repeal of s. 120.1 and the coming-into-force of the Family Law Act

The Family Law Act became law on 24 November 2011. Although most of the act, including all the parts about property division, are not yet in force, other bits came into effect right away, including s. 258 which had the effect of repealing s. 120.1. Fantastic! Since the Attorney General has said that the rest of the Family Law Act isn’t going to come into force for another 12 to 18 months, this means that we’re in the middle of a legislative sweet spot for unmarried couples. 

Unmarried couples may now enter into cohabitation agreements without fear of the grim consequences of s. 120.1, and almost without regard to the property provisions of the Family Relations Act. 

On top of that, unmarried couples probably want to enter into cohabitation agreements if they wish to avoid some or all of the consequences of the property division regime of the new Family Law Act. In other words, if there’s anything about how property will be shared under the new act that browns you off, now is your opportunity to do something about it, and you’ve got 12 to 18 months within which to get it done. 

Get a cohabitation agreement and get it soon

For the next 12 to 18 months, couples across the province will be going through an unpleasant assessment of how their legal rights will fare under the new act. That’s okay, it’s a necessary consequence of change. However, if you are in a relationship of the sort that won’t require you to share your property, that’s going to change too, and if you want to do something about it and don’t want to end your relationship, the time is ripe to get a cohabitation agreement done up.

There will never be a better time to enter into a cohabitation agreement than right now, under the current law and between the repeal of s. 120.1 and the coming-into-force of the property provisions of the new Family Law Act.

Cohabitation agreements are somewhat complicated at the best of times; they’re somewhat more complicated now that we’re in the transition between one legal regime and another. You really must see a lawyer if you want to get a cohabitation agreement drawn up. If you don’t have someone to see, contact the CBA's excellent Lawyer Referral Service at 604-687-3221 or 800-663-1919.

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Supreme Court Releases Decision on Foreign Divorces, Foreign Agreements and Effect of Foreign Law

The Supreme Court of British Columbia has just released its judgment in Sangi v. Sangi, a complex but important case which surveys the rules about when the courts of this province will recognize foreign divorces, how the court should evaluate the fairness of separation agreements negotiated under the laws of another country, and how the court should interpret and/or apply the laws of another country, along with a host of other matters such as:

• determining the credibility of a witness
• the drawing of adverse inferences following a party's failure present a witness to give evidence on an issue
• defending against a foreign judgment on the basis of fraud occurring in the foreign jurisdiction
• determining the authenticity of the records of a foreign court
• measuring whether a foreign agreement is unconscionable or unfair against domestic values and standards

This decision is very well written and provides an eloquent statement of the law in this area, and I would do it a disservice if I tried to summarize it further. Suffice it to say that if you have a legal problem in these areas, this decision is well worth your time to read.

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Okay, so there's (probably) a new law coming. Now what?

Important Update: The Family Law Act was introduced on 14 November 2011. See my posts "The Early and Unlamented Deaths of ss. 90 and 120.1: Government takes quick action on parental support and unmarried persons' property agreements" and "Family Law Act Introduced!" for more information.

Readers of this blog, or any local newspaper really, will know that the provincial government is planning on introducing a brand new Family Law Act sometime in 2011 that will revolutionize family law in British Columbia. I've summarized the proposed new Family Law Act in a previous post.

In September, I published another post which talked about how bill becomes a law and how a law comes into force. One of the points I was trying to make was that the Family Law Act described in the government's White Paper (PDF) doesn't have any legal effect at present and may not look anything like the Family Law Act that comes into force, and a result you shouldn't make any decisions on assumptions drawn from the White Paper.

That being said, I was recently consulted by a fellow who wanted a cohabitation agreement. (I have written at length about why cohabitation agreements are a really bad idea under the current law if the point of the agreement is supposed to be about protecting property; read my post on the subject, "Why you DON'T want a cohabitation agreement," before continuing.) This is an important problem because if the new law looks anything like the White Paper's proposal, the property interests of common-law couples and married couples are going to look very different than they do right now and, either way, the dilemma posed by s. 120.1 of the Family Relations Act will no longer exist.

So what do you do now? Frankly, I'm not sure, and any answer is going to involve an awful lot of assumptions.

If the Family Relations Act is replaced and if the new act looks like the White Paper's proposal, lots of things are going to be different:

• common-law couples will have the same property entitlements as married couples
• the value of property brought into the relationship will be excluded from sharing, as well as certain other kinds of property like court awards and inheritances
• property bought with excluded property will also be excluded from sharing
• agreements about property will only be set aside where there is a defect in the agreement or how the agreement was entered into, such as a misunderstanding about the nature of the agreement or a failure to disclose the existence of an asset

In circumstances like this, it's not clear what a marriage or cohabitation agreement about property might accomplish. Perhaps such agreements would more clearly define which assets are excluded from sharing, or address how excluded property will used during the relationship. Perhaps they would attempt to regulate how property acquired during the relationship will be paid for, or how such property would be divided at the end of the relationship.

Whatever winds up happening, the only thing we know for certain is that the Family Relations Act is the law of the land, and this is the law you need to be thinking of when planning a new relationship. We can't say for certain that the Family Relations Act will be replaced; if it's replaced, we don't know what the replacement is going to look like or when it will come into effect. We also don't know how the replacement will deal with relationships that are ongoing when it comes into effect. Will there be an exemption for existing relationships? If the new law applies to existing relationships, will it apply right away or will there be a grace period?

I think that if you are planning on a new cohabiting relationship and need to be absolutely sure about the law that will apply to your relationship, you're best off waiting until the bill passes final reading. Your second best choice would be to have an agreement not about property but an agreement to negotiate an agreement about property when the content of the new law is known.

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Proving Agreements Made at JCCs

Judicial Case Conferences in the Supreme Court are held on a confidential, in camera and off-the-record basis so that the parties can more effectively explore settlement options, without worrying that they'll be held to a settlement proposal later on. This system usually works quite well, but what happens if people disagree on the terms of an agreement reached at a JCC? How do you prove the terms of an agreement reached at an off-the-record conference?

Normally, the court clerk records the terms of any agreements reached or orders made at a JCC. These are printed out and signed by the parties (or their lawyers) and the judge or master who heard the JCC. The first step to avoiding confusion later on is to make sure that the clerk's record is clear and accurate. If you see an error or an ambiguity, ask to have the record clarified before you leave the JCC. No one will complain, as long as you're being reasonable and not trying to re-argue a point.

If you discover an error or an ambiguity later, and the other side doesn't agree with your recollection of the JCC, you'll have to listen to the tape of the proceedings at the JCC. However, because JCCs are confidential, you don't have the automatic right to listen to the tape of the JCC the way you'd be able to listen to the tape of other court hearings, like proceedings in chambers, and you'll have to make an application for permission to listen to the tape and have a transcript made.

If the transcript backs up your recollection, the other side really ought to agree and that should be the end of it. If not, you'll have to make a second application for an order on the terms of the agreement reached at the JCC, using the transcript of the JCC to support your application.

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Why you DON'T want a cohabitation agreement

Important Update: The Family Law Act was introduced on 14 November 2011 and contains a number of provisions which are critical to the comments I've made in this post. See my posts "The Early and Unlamented Deaths of ss. 90 and 120.1: Government takes quick action on parental support and unmarried persons' property agreements" and "Family Law Act Introduced!" for more information. I've also added a new post, "Cohabitation Agreements and the new Family Law Act," about why unmarried couples probably DO want cohabitation agreement.

Questions about cohabitation agreements come up fairly often in my line of work, and it seems that I'm constantly dealing with this one particular issue: how cohabitation agreements do and do not help to protect assets brought into a relationship. This issue's come up yet again, and I thought I'd write about it in a broader context.

People often think they need a cohabitation agreement when they move in with someone in romantic relationship. That's not true; you don't need a marriage agreement when you marry someone and you don't need a cohabitation agreement when you begin to live with someone.

That being said, there are a handful of good reasons why you might want a cohabitation agreement: if you or your partner are bringing children into the relationship; if you or your partner want to ward against the chance of a spousal support claim when the relationship ends; or, if you want to protect the property you're bringing into the relationship. The last reason is the most common reason people want a cohabitation agreement, and while this strategy may work in other provinces, it doesn't work in British Columbia. In fact, it makes things worse. A lot worse.

To be completely clear: you do not want a cohabitation agreement if you live in British Columbia and the agreement is meant to protect property. Here's why.

The British Columbia Family Relations Act treats married and unmarried couples very differently when it comes to property. For married couples, the act says they should both have an equal share of all of the family assets, regardless of who owns the asset or whether it was brought into the relationship or bought afterward, and most assets will qualify as family assets. For unmarried couples, including common-law couples, the act says nothing at all; unmarried couples are expressly excluded from the parts of the FRA that divide property. Unmarried couples are limited to making property claims under the law of trusts, and that usually produces results that are far, far less generous than the equal split married couples get under the FRA.

In summary...

1. Married Couples: The Family Relations Act presumes that each spouse gets half of all the assets, and almost all assets wind up being part of the pool of assets that get divided. Although this presumption can be challenged, most of the time the assets are split equally or near-equally.

2. Unmarried Couples: The parts of the Family Relations Act that deal with the division of assets don't apply to unmarried couples. Unmarried couples can only make claims against each other's property under the law of trusts, and those claims are tough to prove and hardly ever result in a division close to the division that would have resulted if the couple had been married

This is where s. 120.1 of the Family Relations Act comes into things.

Under s. 120.1, the parts of the FRA that divide property between married couples apply to agreements between unmarried couples that deal with property and would be a marriage agreement had the couple been married. Making things worse, under s. 65 the court has the express authority to order a division of assets other than a marriage agreement calls for if it thinks the terms of the marriage agreement are unfair... and what's unfair? Often a division of assets that is different than the equal split prescribed for married couples.

In other words: if an unmarried couple make a cohabitation agreement about property, the rules about property division for married couples apply to the agreement and the court can divide property using the standards that apply to married couples.

Now, instead of the crappy trust law claims an unmarried couple would have had to suffer through in making a claim to divide assets, the couple have all the benefits of the rules that apply to married couples, including the presumption that a fair division of assets is an equal division of assets. This is hardly the effect most unmarried couples assume a cohabitation agreement is going to have; instead of protecting their assets from division, the agreement has exposed the assets to a potential claim which is much worse than the claim that would have been available without the agreement! A bit counterintuitive, isn't it?

Important Update: The Family Law Act was introduced on 14 November 2011 and contains a number of provisions which are critical to the comments I've made in this post. See my posts "The Early and Unlamented Deaths of ss. 90 and 120.1: Government takes quick action on parental support and unmarried persons' property agreements" and "Family Law Act Introduced!" for more information. I've also added a new post, "Cohabitation Agreements and the new Family Law Act," about why unmarried couples probably DO want cohabitation agreement.

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Supreme Court of Canada Releases Important Decision

On 19 February 2009, the Supreme Court of Canada released its judgment in Rick v. Brandsema (2009 SCC 10), a case about the duty of honesty and fair play spouses owe to each other when they are negotiating a separation agreement.

The court's judgment in this case follows the reasoning it established six years earlier in Miglin v. Miglin (2003 SCC 24), a case about separation agreements and spousal support. In Miglin, the court decided that the rules about commercial contracts shouldn't apply to separation agreements because of

"the particular ways in which separation agreements generally and spousal support arrangements specifically are vulnerable to a risk of inequitable sharing at the time of negotiation and in the future"

which largely result from the unique negotiating environment of separation agreements, an environment of

"intense personal and emotional turmoil, in which one or both parties may be particularly vulnerable."

As a result, the court held that not only must the spousal support provisions of an agreement be fair in themselves, they must be negotiated in a scrupulously fair manner, without either spouse being subject to "circumstances of oppression, pressure or other vulnerabilities."

In Rick, the court took this line of reasoning a bit further, and decided that agreements must also be negotiated with full and complete financial disclosure:

"A duty to make full and honest disclosure of all relevant financial information is required to protect the integrity of the results of negotiations undertaken in these uniquely vulnerable circumstances [of separation]. The deliberate failure to make such disclosure may render the agreeement vulnerable to judicial intervention where the result is a negotiated settlement that is substantially at variance from the objectives of the governing legislation."

The "objectives of the governing legislation" might be the objectives of a spousal support order, as set out in the Divorce Act, or it might be the presumption of an equal entitlement to share in family assets, as set out in the Family Relations Act.

To boil all this down, the cumulative effect of Miglin and Rick is that agreements must be negotiated with procedural fairness (fairness in the conduct of the negotiations) and must ultimately reflect substantive fairness (conformity with any relevant legislative goals) or court may set aside or vary an agreement:

1. The freedom of spouses to negotiate a fair settlement at the conclusion of their marriage depends on the integrity of the bargaining process.

2. The integrity of the bargaining process is at risk when a spouse pressures or manipulates the other spouse, or takes advantage of the vulnerability or weakness of the other spouse, to acheive a good deal. (Miglin)

3. The integrity of the bargaining process is at risk when a spouse fails to make full and complete financial disclosure. (Rick)

4. The integrity of the bargaining process can also be jeopardized simply by the stressful emotional circumstances of separation. (Miglin and Rick)

5. The court will intervene where the bargaining process was flawed and the terms of the agreement are at odds with the objectives of the Divorce Act or the Family Relations Act.

The court's summary is perhaps best:

"[T]he more an agreement complies with the statutory objectives, the less risk that it will be interfered with. Imposing a duty on separating spouses to provide full and honest disclosure of all assets, therefore, helps ensure that each spouse is able to assess the extent to which his or her bargain is consistent with the equitable goals in modern matrimonial legislation, as well as the extent to which he or she may be genuinely prepared to deviate from them.

"In other words, the best way to protect the finality of any negotiated agreement in family law, is to ensure both its procedural and substantive integrity in accordance with the relevant legislative scheme."

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