17 May 2009

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.