Prenups are Likely to be More Popular

Written by David Ruck

Legal arrangements before marriage are increasingly important as splitting the pot after divorce becomes more complex.

How should people’s assets be divided when their marriage breaks up? The current case in the Court of Appeal, in which city analyst Peter Lawrence and his former partner Donald Gallagher are embroiled in a dispute over assets worth some £5 million, has cast a spotlight on this issue and how the courts should treat an asset – in this case a London riverside flat worth £2.4 million that was owned by Mr Lawrence before the 11-year relationship began.

In the past decade, courts have become increasingly willing to draw a distinction between matrimonial and non-matrimonial assets.

In broad terms, non-matrimonial assets, which are often called separate assets, are assets brought into the marriage, and therefore owned by one side or the other before the marriage; or which have been aqcuired as an inheritance or a gift after the marriage and so are treated as coming from a source entirely outside the marriage.

Matrimonial assets, which are often termed joint assets, are all other assets in a marriage and cover everything that is built up during the course of the marriage by joint endeavour. Courts do not differ between the wage earner and the homemaker in this context, and anything built up by the stronger economic party will almost certainly be treated as a matrimonial or joint asset.

The general rule is that matrimonial assets will be divided between the parties equally on divorce, but non-matrimonial (separate) assets are more frequently treated as being of a different nature, and these may either stay with the party who earned or received them independent of the marriage, or may be divided in unequal shares.

But despite this apparent different approach to the different types of assets, the need of either party, usually for adequate housing, will trump any argument as to the nature of the matrimonial assets. So if a party only received 50 per cent of the joint assets, and that would be inadequate to provide him or her with adequate housing, then it is perfectly possible for the court to pass over non-matrimonial assets to meet that need. The converse is also true, namely that if a party’s reasonable needs are clearly met from an equal share in the matrimonial assets, then it is significantly less likely that they will receive a share in the non-matrimonial (separate) assets

This analysis of the nature of matrimonial or non-matrimonial assets has resulted in an increasing number of prenuptial contracts that seek to define which assets are matrimonial and which are non-matrimonial, and how they will be divided on divorce.

Furthermore, in the light of the recent decision in the case Radmacher, involving a wealthy German heiress, Katrin Radmacher and her former husband, a banker turned academic researcher, Nicolas Granatino, which appears to indicate that a prenuptial contract will be treated as being binding unless there are persuasive reasons for not doing so, there is an increased willingness on the part of marrying couples to enter into contracts of this type, particularly if either believes that it may provide extra protection for their non-matrimonial assets.

The distinction in type of assets can be important. In the recent case of AR v AR decided in the High Court in August 2011, the total family wealth was between £21 and £24 million, of which all but about £1 million was in the husband’s name, and it was clear that the vast bulk of this wealth arose from inheritance or gifts to the husband from his family. These could were described as “separate” or “non-matrimonial assets”, as they were clearly not the product of the parties’ joint endeavours during the course of the marriage.

The court then had to decide how to divide the family assets, taking into account the nature of this wealth and the weight to be attached to this as a factor in deciding that division.

The judge decided that need was the magnetic factor in the case, and that the “sharing principle” did not justify any additional or enhanced award above that level of need, albeit generously interpreted. The wife received a total award of £3.3 million, which was deemed to be fair and to represent a just application for the principle of need. Clearly that was a very significantly reduced award from one reflecting an equality of division, which had in the past been the starting point for any court.

So, assuming both kinds of assets will become increasingly important on divorce, entering a prenuptial contract on marriage may well have a significant benefit to the party bringing separate or inherited assets into the marriage, or being likely to receive them by way of inheritance or gift during the course of the marriage. It can also have the benefit of defining precisely what those separate assets are, given that a contract of this sort will usually involve a precise listing of the non-matrimonial assets at the time of the marriage.

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David Ruck

Gordon Dadds