For better not for worse – Why you need a contracting out agreement

While keeping the business in the family may be a good idea, recent case law suggests things can quickly go sideways (to an ex-partner or spouse). Blake v Blake and Preston v Preston should be taken as a warning to New Zealand family business owners and highlight the importance of having an up to date contracting out agreement in place…unless of course you have a spare $50 million sitting around.

Blake v Blake

Mr Blake set up a civil engineering business prior to his marriage to Mrs Blake. Prior to their marriage in 1986, the parties signed a contracting out agreement, which specified that the shares in the two companies HML and SCL were Mr Blake’s separate property. In 1993 after the parties set up their own trusts to purchase the family home, they entered into a second contracting out agreement which confirmed their first contracting out agreement. The court held that both these agreements were inadequate to protect the increase in value of the family business upon the parties separation after over 20 years of marriage.

In 2016, when the couple separated, HML had increased in value by over $110 million. The High Court held that Mrs Blake’s contribution (as a mother and wife) had contributed to the increase in value of HML by enabling Mr Blake to devote his time to the business. The Court awarded an equal 50/50 split of the increase.

Preston v Preston

Family businesses are not necessarily safe within a trust either. In Preston v Preston the court proceedings lasted longer than the relationship and resulted in the Supreme Court awarding approximately 15% of the value of the business to Mrs Preston.

Before meeting Mrs Preston in 2007, Mr Preston had owned a contracting company (EBT). In 2008, Mr Preston put the shares in EBT into the GPF Trust. He then began a relationship with Mrs Preston in 2009 and they separated in 2015. The parties did not enter into a contracting out agreement. The end result was years of expensive litigation and an outcome that Mr Preston clearly did not plan for.

What are the lessons?

A relationship break-up between a key person of a family business and their spouse or partner can have serious financial consequences for that family business. It can cause cashflow issues or force a business to be sold. It can distract key persons from growing the business. It can cause stress and waste precious time dealing with complex litigation.

The main planning tool to manage relationship break-ups is the contracting out agreement. This agreement gives partners and spouses certainty as to their interests in the family business on separation or death. A contracting out agreement should cover the status of the family business under the Property (Relationships) Act 1976, how the family member is compensated for work done in the family business and claims against related trusts. These agreements can have a shelf life and should have a review clause that enables them to be updated from time to time. Some say true love lasts a lifetime but a contracting out agreement could help to ensure your business does too.

Written by Israel Vaealiki and Kiera Quinn from Jackson Russell’s Property and Private Client Team.