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The Law Commission’s Report on Matrimonial Property, Needs and Agreements

Spencer Clarke, Lawyer in the Property, Family and Trust Law Team at the Law Commission considers the Key recommendations of the Law Commission’s Report on Matrimonial, Property, Needs and Agreements

Spencer Clarke, lawyer, The Law Commission

Introduction and Context

The Law Commission for England and Wales has just published its report on Matrimonial Property, Needs and Agreements. The project has seen, first, the publication of a Consultation Paper in 2011, dealing with marital property agreements, and, in 2012, following the extension of the project, a Supplementary Consultation Paper focusing on the additional areas of financial needs and non-matrimonial property.

Our key recommendations in the Report are for:

1. guidance to be produced by the Family Justice Council on the law regarding how financial needs should be met on divorce and dissolution; and

2. the introduction of binding nuptial agreements, to be known as qualifying nuptial agreements.

This article sets out the context of our recommendations before turning to a discussion of our key policy points, concluding by examining the benefits of our proposed reforms.

Qualifying nuptial agreements ("QNAs") are a species of marital property agreement, also known as nuptial agreements. Such agreements can include both the increasingly familiar pre-nuptial agreement and the less common post-nuptial agreement. Both aim to regulate the financial consequences of separation and divorce (or dissolution of a civil partnership) at a time when such a separation has not happened.  They could also encompass separation agreements made at a time when the relationship has broken down; we have not focused on these as their legal status is already uncontroversial.

Our Report emerged in a context where, over 20 years, nuptial agreements have moved from the margins towards the centre of family law in England and Wales, at least in high value cases. In the mid 1990s 1 the effect of pre-nuptial agreements on the outcome of what were then called ancillary relief proceedings was still very limited. Judges were constrained by the public policy rule that agreements relating to a future and hypothetical separation were void because they might encourage the breakdown of marriage. There was also a second public policy rule: that agreements could not remove the court's jurisdiction to order financial provision on divorce.

Gradually, however, judges began to accord more weight to nuptial agreements. The Privy Council case of MacLeod v MacLeod 2 swept away, for post-nuptial agreements, the first public policy objection; for pre-nuptial agreements this had to await the Supreme Court's decision in Radmacher v Granatino, 3 handed down some months after the beginning of our project. The Supreme Court said that, provided each person had a full appreciation of the implications of the agreement, the court should give effect to nuptial agreements unless it would not be fair to hold parties to their agreement. So agreements have acquired a status as close to binding as can be achieved without legislation.

We take the view, following consultation, that the time has come for such legislation, hence our recommendation for the introduction of QNAs. In making this recommendation, discussed in more detail below, we have recommended that 'needs' be the safeguard for QNAs – so that couples entering into a QNA will not be able to contract out of meeting each other's financial needs on separation and divorce.  Our Report sets out in full the other safeguards we considered but we did not think that 'fairness', as used by the Supreme Court in the Radmacher case would work for QNAs. We take the view that it is too inexact a concept to supply a safeguard with the level of certainty that is necessary to ensure that QNAs will be useful.

Understanding the needs that must be met on divorce is therefore essential for QNAs to work successfully.  It is also the single most important area for the law of financial provision on divorce given that, for most couples who separate, there is little possibility of sustaining the marital lifestyle for two households rather than one. Meeting each party's needs becomes a matter of stretching resources and choosing priorities. Therefore, for most of those who are separating, this will be our most relevant recommendation.

We do not think that wholesale reform of the law relating to financial needs is currently necessary. It is only one factor to which the court's attention is drawn by the statute (albeit often the pre-eminent one). Any reform should be in the context of a full consideration of the law of financial relief, which is outside the scope of the project. 

We also considered, following the extension of the project, 'non-matrimonial property'. This category of property, which includes property acquired by one party before the marriage, or received by gift or inheritance during the marriage, will not be shared on divorce unless required to meet the financial needs of a party. For the majority of those who are separating this consideration will be irrelevant as the couple's assets will be required to make provision for their needs, whatever their source.

Our Policy

Needs
In our Report we explain the extent of "financial needs" in the family law of England and Wales: that it is a broad concept covering provision by way of capital as well as income and both long-term and short-term needs. Family lawyers, through experience, are confident in advising on the likely range of outcomes in each case, but the understanding of litigants in person or those seeking to reach an agreement outside the judicial arena is hampered by a lack of awareness of the aim of financial provision on separation. Those 'going it alone' will form a growing proportion of users of the family justice system and their difficulty in understanding what needs means in part stems from this lack of a statutory objective. The absence of an explicitly stated objective also fosters the geographical inconsistency in judicial decision-making which we have noted in the Report.

In practice, we believe that the purpose behind financial relief on divorce, aimed at meeting a couple's (separate) needs, is evident in practice, if not always clearly stated.  The objective is, and should be, to enable the parties to make a transition to independence, in a way that takes account of the choices made within the marriage or civil partnership, its length, the parties' ongoing shared responsibilities (for example, for any children), the need for a home and the standard of living during the relationship.

We think this is what, for the most part, the courts are doing anyway. Despite what seems to be a widespread public perception, most financial provision could not be described as a 'meal ticket for life'. In the majority of cases there is no order for periodical payments to a spouse and even where there are such orders made, by agreement or otherwise, some will only be for a term rather than for 'joint lives' (that is until the death or remarriage of one party). But there can be an inconsistency in approach, for example with regard to the duration of such orders, between courts in different areas.

We have therefore reached the conclusion that the provision of guidance on meeting financial needs on divorce, which would include a statement of the objective of independence, is necessary. We offer a sketch in the Report of what we think the proposed guidance should cover, in terms of the level at which needs are met and for how long such provision should endure. We distinguish between cases where there are children, and where there are not, and comment on the use of both joint lives and term orders for maintenance.

We seek only to make clear, and reinforce, what might be called the 'mainstream' approach to decisions on financial provision on divorce, rather than recommending reform in how needs are approached. We do not consider that statutory reform would be proportionate or desirable. Guidance from an authoritative body, consisting of the judiciary and practitioners, as well as the users of the family justice system and experts, with government officials in attendance, best answers the need we have identified. The Family Justice Council is such a body. We recommend that they produce guidance to be published in both hard copy and electronically, and that there should be a plain English version for the public, in addition to a more technical version aimed at the courts and family lawyers. The guidance can and should be revised and updated regularly.

We go on to recommend that the government provide support for further work to see if guidance can be developed that provides figures, rather than just words.  We know that, particularly among practitioners (mindful of the difficulties of the first child maintenance calculation), there has been resistance to the idea of a 'formula' for spousal support and we acknowledge that no formula can take account of all aspects of each unique case. But an increasing number of people separating from their spouses or partners will not be able to afford 'tailor-made' legal advice, and the court system simply does not have the capacity to adjudicate each case.

We think the time is right for work to be done to see whether calculations for spousal support can be developed. Rather than a single answer to each case we think that the calculations should generate a range of provision to meet need, encompassing both its income and capital aspects. If this can be done, separating couples can then negotiate their own financial settlements within these ranges, confident at least that they are 'in the bracket'.  We look, in particular, to the positive Canadian experience of developing their 'Spousal Support Advisory Guidelines'.

Qualifying Nuptial Agreements
Our Report includes a draft Nuptial Agreements Bill, to introduce QNAs. The majority of those who responded to our consultation supported the introduction of binding pre-nuptial agreements and we take the view that there are strong arguments in their favour. In particular we focus on those of the autonomy of the parties to the marriage, and certainty of financial outcome on any breakdown, leading to a reduction in litigation and its attendant cost and stress.

By entering into a QNA the parties will remove the discretion of the court to make orders that are inconsistent with the terms agreed by the parties, save for orders necessary to meet needs. Consultees did raise concerns that binding nuptial agreements could potentially cause hardship: we think that the safeguard of needs answers this concern. As would be expected, a QNA will not be able to fetter the court's power to make financial provision for children, consistent with public policy.

Needs in the context of QNAs are needs as they are understood in family law generally, and as clarified by our proposed guidance: we do not favour a more limited conception of need purely for nuptial agreements. Couples can include provision in their QNA which is intended to meet their needs on divorce but such terms will be subject to the court's scrutiny for their fairness, as they are at present.

QNAs will be appropriate only for those couples where one or both have, or expect to acquire, assets that would exceed those necessary to meet the couple's needs on divorce.  The QNA might be aimed at protecting specific property, for instance, an inherited house or a valuable shareholding generated as a result of individual business enterprise. While, in the same way as current pre-nuptial agreements, QNAs will therefore be of most interest to wealthier couples, they may also appeal to those who are marrying later in life, perhaps not for the first time. Couples in this latter group, while not wealthy, may each have sufficient assets to meet their needs, and may wish to preserve their property, often for the benefit of children from a previous relationship. QNAs could also be of interest to younger financially independent couples who do not have children (as the birth of children may create a situation where one party can no longer meet their own needs on divorce, because of caring responsibilities).

In order to provide protection for the parties entering into a QNA we have recommended that agreements will only qualify if certain formal requirements are met:

1. The agreement must be contractually valid and enforceable.
2. The agreement must be made by deed.
3. It must contain a statement signed by each party that he or she understands that the QNA will restrict the court's discretion to make financial orders.
4. The agreement must not be made during the 28 days ending with the day on which the marriage or civil partnership is formed.
5. At the time the agreement is formed both parties must have received:

a. Disclosure of material information about the other party's finances; and
b. Independent legal advice (the provision of a statement signed by each party and their lawyer confirming that such advice has been provided will create a presumption that this requirement has been met).

The Nuptial Agreements Bill also extends the court's existing power to vary maintenance agreements so that this includes, for the first time, pre-nuptial agreements. This follows from the comments made by the Supreme Court in Radmacher v Granatino that the public policy rule that made such agreements void should no longer apply. Given that those comments were not strictly required for the Supreme Court's decision in the case, our Bill abolishes, if it still exists, that public policy rule. It also makes clear that provisions in nuptial agreements which seek to restrict the jurisdiction of the court to make financial orders will continue to be void, unless the agreement constitutes a QNA. 

Non-matrimonial property
We have not made any recommendations with regard to non-matrimonial property. Following consultation it became clear that there were widely differing views on what statutory reform might look like. There was no clear majority view, amongst our consultees, on important issues such as whether the family home should ever be regarded as non-matrimonial property, whatever its source, and whether property acquired during cohabitation leading to marriage or civil partnership should be regarded as matrimonial or non-matrimonial property.

We felt that any statutory reform of the law on non-matrimonial property would therefore be unacceptably controversial and that the use of a QNA would offer the best alternative solution to statutory reform. How non-matrimonial property should be treated by the court on divorce will only be relevant where it is not required to meet needs; couples for whom this will be relevant will also be those for whom a QNA will be a real possibility. We take the view that the best approach is for those couples to create their own rules for non-matrimonial property in a QNA, subject always to the overriding requirement of need.  This could include provision on the thorny questions of the status of non-matrimonial property that changes over time, in which investment is made by one or both spouses, or which is used by the family, as well as the other 'problem areas' identified above.

We express a preference as to the more desirable judicial approach to non-matrimonial property, of the two approaches that have developed. We believe that the better method is that which identifies the non-matrimonial property, disregards it, and shares the remainder equally (subject to the parties' needs being met), exemplified in the case of Jones v Jones4 This is in preference to the more broadbrush approach which shares the couple's property in proportions which the court considers to be fair, taking into account the presence of non-matrimonial property (seen in the case of Robson v Robson 5). We consider the former approach to be clearer and more conducive to promoting financial settlement.

We do not agree with what appears to be the prevailing judicial approach of sharing any growth in non-matrimonial property during the marriage, unless it is 'passive growth'. We take the view that this unfairly penalises those spouses who maintain and develop their property during the marriage.

Conclusion
Our Report builds on existing practice and trends in family law while seeking to promote certainty and clarity across the financial spectrum of the cases seen in the family justice system.

In a climate where more people will have to manage without legal advice, either reaching agreements between themselves or with the assistance of a mediator, we hope that the proposed guidance will make the law more accessible. We think it will help these couples to understand the central principles of the law on need so that they can be confident in the settlements they reach outside court. It will also reassure those couples whose cases reach the court that they are benefitting from consistent justice. It should assist the judiciary of the Family Court by reinforcing 'best practice' and make it easier for practitioners to advise their clients.

Those couples whose assets meet or exceed their needs can use QNAs to regulate in advance the arrangement of their financial affairs should they separate. In addition to offering such couples increased autonomy this will enable more certain protection of family property, inheritance and businesses, and help to avoid the cost, in all its forms, of financial proceedings on divorce and dissolution. The introduction of QNAs will also bring us into line with the the majority of other jurisdictions where binding marital property or nuptial agreements are commonplace, potentially encouraging international couples to settle here and bringing wider economic benefit to England and Wales.

The Report and the draft Bill, accompanied by an Executive Summary, an Impact Assessment and the responses to both consultations can be found on the Law Commission's website.

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1  In cases such as F v F (Ancillary Relief: Substantial Assets) [1995] 2 FLR.
2  [2008] UKPC 64, [2010] 1 AC 298.
3  [2010] UKSC 42, [2011] 1 AC 534.
4  [2011] EWCA Civ 41, [2011] 1 FLR 1723.
5  [2010] EWCA Civ 1171, [2011] 1 FLR 751.