Pre-nuptial agreements – the preserve of celebrities or a practical solution to ring-fencing assets?

In 2005 American Hip Hop artist Kanye West famously sang about gold diggers and the merits of obtaining a “Pre-nup”. Nine years later he is set to marry television personality and business woman Kim Kardashian, with much media coverage surrounding their Pre-Nuptial Agreement.  Interestingly, rumours suggest that their Pre-Nuptial agreement not only makes provision for Kim to receive $1million for each year she is married to Kanye, she will also reserve the right to keep all money derived from her hugely popular television show, “Keeping up with the Kardashians”.  Arguably Kim is ring-fencing a pre-marital family business.

 

I am not suggesting that Kim and Kanye’s lifestyle or indeed their Pre-Nuptial agreement is in any way a realistic paradigm for agreements “normal” couples are likely to enter into before marriage but that does not mean that Pre-Nuptial agreements should be reserved for the rich and famous.

 

Historically Pre-Nuptial agreements, formally known as the Anti-Nuptial Marriage Contracts, were widely used by the wealthy.  It should be remembered that traditionally when marrying, wives surrendered their right to moveable property and the right to administer their heritable property to their husbands.  However, with the introduction of the Married Woman’s Property (Scotland) Act 1881, which abolished a husband’s right to his wife’s moveable property and the Married Woman’s Property (Scotland) Act 1920, which abolished a husband’s right to administer his wife’s heritable property, the use of Pre-Nuptial agreements in Scotland, understandably, began to decline.

 

In recent years there has been a revival in the use of Pre-Nuptial Agreement in Scotland and indeed our neighbours south of the border have begun to question whether or not their own laws need to develop to give legal recognition to Pre-Nuptial agreement.  The traditional view in England was that Pre-Nuptial agreements were contrary to public policy.  Parties could not preclude a court from dealing with financial provision on divorce or from invoking its jurisdiction.  In England Pre-Nuptial agreements are not binding.  However, in February this year the English Law Commission recommended that Pre-Nuptial agreements should be legally binding in England in divorce settlements, but only once the needs of the parties and children of the marriage have been taken into consideration.

 

If a couple do choose to enter into a Pre-Nuptial agreement in Scotland they should always be advised by their respective Solicitors that Pre-Nuptial agreements are not watertight.  In addition to the usual circumstances where a contract can be reduced (i.e. coercion, misrepresentation or lack of capacity) the Family Law (Scotland) Act 1985 (hereinafter referred to as “the 1985 Act”) specifically provides for the setting aside or variation of a Pre-Nuptial agreements.  Section 16(1)(b) of the 1985 Act provides the court with the powers to set aside a Pre-Nuptial agreement where the agreement or any term of the agreement, was “not fair and reasonable at the time it was entered into”.  Subsequent case law, however, has established that the courts will not set aside an agreement lightly.  In the 1995 case of Gillon –v- Gillon[1] Lord Weir stated that “the court should not be unduly ready to overturn agreement validly entered into.  The fact that it transpired that an agreement has led to an unequal and possibly very unequal division of assets does not by itself necessarily give rise to any inference of unfairness and unreasonableness”.

 

In cases where one spouse is looking to have a Pre-Nuptial agreement set aside, the onus is very much on that spouse to establish that the agreement was not fair and reasonable.  Each case will turn on its own facts and circumstances. Circumstances which have given rise to a successful application to have the agreement set aside are, for example, where incorrect or incomplete financial information at the time the agreement was executed was provided by one party or both parties have not obtained independent legal advice.  In considering case law it is clear that the most successful Pre-Nuptial agreements seek only to ring-fence pre-matrimonial assets or property derived from pre-matrimonial assets, as opposed to agreements which look to deal with the specific financial provision on divorce and the discharging of any right to claim financial provision.

 

Who should consider entering into a Pre-Nuptial Agreement?

There is little doubt that Pre-Nuptial agreements are as romantic as petrol station forecourt flowers on 14th February, but I would always advise clients who have significant pre-marital assets or family businesses to consider entering a Pre-Nuptial agreement.  As the average age of those who marry for the first time steadily increases and as society changes and the number of people having second or even third marriages rises, more and more parties enter into a marriage having already accumulated significant moveable and heritable property.  Prospective spouses may also have to consider preserving pre-established assets for children from previous relationships.  Whilst Scots Law is clear that property acquired before marriage is not deemed matrimonial property and will not be subject to division on divorce, courts will always give consideration to an individual’s “resources” and thus pre-established assets can be brought into contention. Those who operate family businesses also need to be aware that changes to pre-marital family businesses during the marriage can convert non- matrimonial assets into matrimonial assets. Increasing a company’s share issue, re-structuring a partnership or reinvesting profits from a business into new ventures can all have the effect of changing a non-matrimonial asset into matrimonial assets which your spouse is entitled to make a claim on on divorce.  The best way to protect your pre-marital assets, including family businesses, is to enter into a Pre-Nuptial agreement which ring-fences these assets and any profits derived from that business.

 

Remember, when entering into a Pre-Nuptial Agreement learn from other people’s mistakes.  To secure as enforceable an agreement as possible, there should be full disclosure between you and your spouse.  You should both receive independent legal advice from two separate legal firms.  The agreement should be signed some time before the wedding, so that the last minute pressure of signing the agreement or the wedding will have to be cancelled scenario does not arise and in itself form an argument that the spouse was coerced into signing.  Finally, the Agreement should state within it that it is both fair and reasonable at the time it was entered into.

September 10, 2014