Seeking agreement on prenups

First published in the Solicitors Journal for 11^th March 2014 and reproduced with their kind permission

Ring-fencing inherited assets, separating out property owned before the marriage, keeping business interests apart; all these are common aims when entering into a pre-nuptial agreement. But is the pure ‘what’s mine is mine’ approach to drafting prenups, in which one party receives nothing at all from the wealthier party on a future divorce, now seriously endangered?

State of flux

Drafting agreements that deal with unknown future events is difficult. Doing so when the law is in such a state of flux is doubly so. Agreements need to try to reflect the wishes of the parties, but work within the context of what the law finds acceptable at the time. That has been changing rapidly and future developments are uncertain.

Some of the cases coming before the courts now involve prenups drafted many years ago when agreements were afforded relatively little weight. Later agreements, drafted after Granatino v Radmacher [2010] UKSC 42, will reflect a different legal context, in which prenups are treated as being of much greater influence, with the onus on the challenger to show why the prenup should not be upheld.

Those entering into agreements now will need to heed the message coming from the courts about the financial needs of the parties: that needs must be met. If, at the time of divorce, one person is not able to meet his or her needs (and those of any children), then a prenup which provides for the financially stronger person to retain all of their wealth and assets, leaving the other in financial need, is likely to be adjusted. The route of absolute zero provision in prenups may therefore be an increasingly dangerous path to tread.

Reasonable needs.

At present, the most common ground for attacking a prenup is that it fails to meet reasonable needs, despite attempts at ‘contracting out’ of meeting those needs by the signing of the prenup.

The award to the husband in Granatino was not made on the basis of his absolute penury; the husband had an earning capacity. It was a capacity lower than it had been and he had no prospect of maintaining the extremely high standard of living enjoyed during the marriage which the wife’s wealth had funded. But the disparity between the parties was huge and the difficulty that the husband would have in providing at a suitable level for the children when they stayed with him was what justified an award outside the scope of the prenup.

The situation in Luckwell v Limata [2014] EWHC 536 (Fam), decided last month, was somewhat different. The wife’s wealth was not in the range of the super wealthy. The majority of the funds were tied up in the house and the source of the assets was the wife’s father; she was entirely reliant on family financial support.

The father imposed strict conditions on the provision of funds and required agreements to be signed by the husband agreeing not to make any claim on the property or other assets before the father would provide funds to buy the family home.

Three separate agreements were signed, confirming each time and on advice that the husband would not make any claims. The judge found that the husband had understood and intended to be bound by the agreements, but adjusted the prenups to the extent of providing the husband with a house during his life – though not to be owned by him – and to pay off his debts to give him a clean start.

Limited capacity.

By the time of the divorce the husband had very little income, limited earning capacity, and debts of some £250,000. So, although the disparity between the parties was not as great as in Granatino, this husband was struggling to make provision even at a basic level for himself and, importantly, for the children when they spent time with him.

It was this lack of funds to meet essential needs that was at the heart of the decision by the judge to depart from the terms of the prenup.

However, the judge attempted to make the adjustments less generous than the kind of settlement the husband would have received if there had never been a prenup, by giving him the use of a property to be bought by the wife, but not to benefit from it outright, as if it were a schedule 1 case.

The presence of children and their needs has been a central factor in recent decisions and it may well be that a tougher approach to needs would be evident in non-children cases. It is still uncertain how ‘unfair’ a prenup can be and still be upheld.