To BFA or not to BFA? that is the question

[Rebecca V1.0]

Hi SSers

I’m hoping some experienced legal brains might be able to help me out with an issue I’m having difficulty getting my head around. Obviously, you can’t beat professional tailored advice but I’m trying to get my understanding up as far as I can before I start paying for an adviser's time.

My partner and I are just at the beginning of our investment journey and, encouraged by family, have decided to get ourselves moving, make a plan and purchase an investment property. So that makes me a newbie investor and a FHB. I’m reading everything I can get my hands on, including most of Somersoft!

I guess my question comes down to structure and asset protection.
So far we have always lived 50/50 financially, splitting bills and keeping separate bank accounts, it works well for us. My partner has savings, enough for a small deposit, whereas I have only have personal debt but a larger income. It might take me another 2-3 yrs to clear my debt and save an equivalent amount so that we can start 50/50.

I want to move ahead now as time in the market is money, but I want to ensure that my partners deposit is protected i.e should the worst case scenario happen and our relationship breakdown and we decide to sell, that my partner gets their deposit back and the remainder is split 50/50.

We spoke to a broker, about the loan obviously, but mentioned this issue. He referred us to a solicitor and said that we needed a ‘partnership agreement’. The solicitor quoted a ballpark of $5000 to write a binding financial agreement (‘BFA’), which is a pre-nup. We have no issue with going down this route if it is the only way to protect ourselves, but that is a great big chunk of the savings and massively reduces our purchasing ability and so I’m trying to weigh up the alternatives.

• 
  Do I stand a chance of being able to draft this agreement myself (I’m a law student so legal research into BFAs is not beyond me) and getting a solicitor to rubber stamp it for considerably less money?

• 
  Is the only way around this to purchase solely in my partners name and I save for a couple of years and we purchase a future property either jointly or in my name?

• 
  Are the difficulties of trying to allocate assets between us going to outweigh the up-front cost of the pre-nup in the long run?

• 
  As we’ve been living together for more than 2 yrs anyway we therefore have de-facto property rights over each other. Are we really gaining anything out of this? Is it fictitious to think of theirs and mine anyway?

My brain is going round in circles trying to weigh all this up

I know we aren’t the only couple in the world who like to keep separate finances and don’t align to the whole ‘we are one person’ paradigm. I’d love to hear how others have tackled these issues and successfully embarked on a joint venture.

Sorry for the long post

 

[Terry_w]

Sounds like you are on his side - you would benefit by not having a BFA, so let him go to the trouble of getting one set up if he wants.

You could possibly do your own BFA but a solicitor will need to act for each party in explaining it. IN fact I think there are cheap ones available on online document provider sites. But you really need to know what you need to put in the document. If you leave something out it could mean the BFA can be invalid.

You should also look at the Family Law Act for the relevant sections. There are different sections for each of before/during/after marriage and defacto relationships. Look at the section in which they can be overturned.

And, how much deposit is this guy worried about? It is probably not worth the effort if it is only small...

 

[Aaron_C]

I don't think being a law student equips you to write your own BFA...

 

[Rebecca V1.0]

Hi Terry,

Thanks for your response.
Absolutely I'm on her side (hey you had a 9/10 chance of guessing the gender right ) Like I said, our financial independence works really well for us. It's actually me that's wants to keep it protected. I really don't get the 'traditional' norm of throwing all your separately accumulated assets into one big melting pot. I have no want to have any claim over the money.

We're only talking about $60k or so $5k in legal fees will take a sizeable dent.
I understand the requirements of independent legal advice for both parties. If either of us were Paul McCartney it would make total sense. It seems a little excessive to get 2 solicitors to hammer out a negotiation to protect a status quo in our situation.

 

[Rebecca V1.0]

I don't think being a law student equips you to write your own BFA...

Point taken Aaron, I'm happy to admit I'm a know nothing law student

 

[Aaron_C]

Point taken Aaron, I'm happy to admit I'm a know nothing law student

Done it too.
Law school is fine but don't try to use it yet!

 

[Terry_w]

It could also be used against you - one side drafting the agreement biased against the other.

 

[EarlyRetirement]

Rebecca,

BFA's are a huge liability risk for family lawyers. Many refuse to sign the mandatory statement of legal advice for this reason or go anywhere near the things.

The reason lawyers charge so much for BFA's is not necessarily because they are complicated to draft, although of course sometimes they are, but moreso because of the risk to the firm if things go wrong.

No reputable family lawyer will 'rubber stamp' a BFA.

You also need to keep in mind that you and your partner both need independent legal advice to enter into a BFA i.e. different lawyers. So there will be two lots of legal fees to pay.

In answer to your other questions, I would not recommend purchasing the property solely in your partner's name. Although for family law purposes it is generally irrelevant whose name the assets are in (the contributions made to those assets is a different story), practically if you have only an equitable interest in the property and your relationship breaks down you don't want to have to worry about caveats/injunctions if your partner threatens to sell or otherwise deal with the property without your consent.

The BFA is clearly to your partner's advantage; not yours. Given that you have no intention of chasing the $60k, unless she is the one who is really concerrned about protecting her assets, I am not sure why you are worrying about a BFA.

If you are in a position where either of you could seek de facto property orders against the other (over the 2 year threshold) upon separation, the reality is that unless either of you has signficant assets, you'd be mad to commence legal proceedings and spend tens of thousands of dollars fighting over a small asset pool.

Depending upon the contributions you both made, it might be the case that you are entitled to a nice chunk of the equity in the property if you separated in the near future. For this reason, on balance, it might be your partner's preference for you both to enter into a BFA.

There's no right or wrong answer from your side of things. From her perspective, there's probably a strong case for a BFA but it will of course come at an initial cost.

Good luck!

 

[nathank]

Why would you not just buy in the name of a fixed unit trust and make the units relatively weighted to the amount of the deposit your partner contributes?

so if you buy a property for $600k, leaving a loan balance of 540k which i'm assuming you'd split 50-50, that would give her 60k + 270k = 330k "units" and you 270k units of ownership. Loosely (ducks the rocks being thrown my way), trust units work similarly like shares in a company, so you have apportioned ownership based on the units you hold. You can make it 100 units or a 1,000,000 units, the divisible number doesn't really matter.

This way, you're both protected financially based on your contributions and you're both legal owners. So you can still live in, rent it out (and apportion neg gearing etc).

The downside is that you will loose 6 years of CGT exemption if you want to use it as your PPOR and plus you have some on going costs of book keeping for the trusts (between $2-3k per year).

TerryW is your man for trust advice as well and there are loads of brokers here that can help you with organising the finance piece.

 

[thatbum]

Why would you not just buy in the name of a fixed unit trust and make the units relatively weighted to the amount of the deposit your partner contributes?

I don't think that would affect anything in family law sense.

 

[RPI]

BFA's where you both agree are great and they are affordable, $5k is nuts, we are not cheap and charge just over a 5th of that. Maybe they use that as a disincentive because they are more after the messy family law stuff.

We do not touch family law. But if BFA's are treated as just part of prudent business structuring like trusts, companies, shareholder agreements, SMSF's etc and they are not done in emotional circumstances they are great. Still need to be right and other party has to pay for independent advice, preferably from someone who actually knows what they are doing (hello Grant Hackett's lawyers you can't advise both sides and probably should know that when dealing with $4m+).

D

 

[Terry_w]

I've just attended a law course where the topic of BFAs come up. We were speaking to a person from the company that insures lawyers. Family law is one area high on the risk list of getting sued (conveyancing is tops) and 95% of the problems in the family law class relate to BFAs. So much so that several of the family lawyers present are now refusing to do them and one of the big specialist family law firms has also stopped doing them.

One of the first things someone will do when they separate and find they cannot make a claim is to blame the lawyer that advised them on the BFA and say they didn't explain xx and didn't tell me about yy.. This is such a problem that a lawyer should take copious notes of the meeting and then follow it up with a 10 page letter to client explaining everything that was explained to them again (probably best to give this before the client signs).

There also seems to be a lot of pressure on people out there to sign. One lawyer had a client who was told by the future husband no sign = no wedding. He had his BFA drawn up and refused to change even one word. If she didn't like it she didn't have to marry him. The marriage didn't last long and she came back to blame the lawyer. He had sent her away refusing to sign off on it and she came back pleading etc etc. In the end he did it, charged her a large amount of money for the time and the letter and file notes etc.

$5,000 does seem a reasonable figure considering all this.

 

[RPI]

In Qld we have our own in house law insurance, although it is not technically legally insurance as it is based out of Singapore and is not a registered insurer under Australian legislation.

Conveyancing tops it Qld by a long way also.

We use our own well developed BFA, it actually takes us very little time to complete in reality. We allow 3/4 hours of our time we bill on this for the explanation side of it. You just have to be thorough and you also need to be comfortable that the other party has received full and frank independent advice. But for us this is just like explaining another complex financial document that we do every day of the week. Not dealing with emotional messy crap gives us a completely different perspective on it to family lawyers.


D

 

[Rolf Latham]

One of the first things someone will do when they separate and find they cannot make a claim is to blame the lawyer that advised them on the BFA and say they didn't explain xx and didn't tell me about yy..

this sounds just like ...........................

I didnt know that if I offered a guarantee to my company, and I didnt want to pay the loan anymore because the value had dropped below the loan value the lender would make me personally liable, I mean I didnt read the document before signing, and because im not a sophisticated investor mr/ mrs Magistrate you cant find a judgement against me .......surely.

Its that weasel ideology why independent legal advice is now recommended before you commit to tinting the paint for the house

ta
rolf

 

[RPI]

this sounds just like ...........................

I didnt know that if I offered a guarantee to my company, and I didnt want to pay the loan anymore because the value had dropped below the loan value the lender would make me personally liable, I mean I didnt read the document before signing, and because im not a sophisticated investor mr/ mrs Magistrate you cant find a judgement against me .......surely.

Its that weasel ideology why independent legal advice is now recommended before you commit to tinting the paint for the house

ta
rolf

If you paint glows in the dark you don't need to seek advice about tintiing it though, cause you know it rocks straight away.

Dealing with potential clients who complain that they did not agree to something that they agreed to in writing is a PITA.

I had someone call the office recently who did not know he was a director of the company that he also was employed by, even though he signed the documentation and it was a requirement of the company's licence, that he as the licensee (and therefore should have known the requirements of being a licensee) was the director.

 

[westminster]

Hi SSers

I want to move ahead now as time in the market is money, but I want to ensure that my partners deposit is protected i.e should the worst case scenario happen and our relationship breakdown and we decide to sell, that my partner gets their deposit back and the remainder is split 50/50.

This is the crux of it and the part I don't get. You want to ensure that your partner gets back her deposit BUT the only person that claim against it is YOU. So you want to ensure that you can't claim against it - do you think that you will change your mind and one day claim more if you break up?

Should you break up assets don't need to be divided 50:50. You can come to a private agreement at breakup how assets are divided and providing you are a decent soul then you will say "ok the place is worth XX and you put in the deposit, so it's XX minus deposit then divided 50:50"

If you both pay this loan 50:50 but the deposit is unequal then this is the way to go I think.

I don't think you need a BFA - unless you think you might turn into a complete and raving nutbag when you break up.

 

[Rebecca V1.0]

Thanks for your insight guys

@ Westminster
I get that it's strange that I am trying to protect the money from myself. The missing puzzle piece is... family. I need it to be transparent to the 'interested parties' that everything is protected.

It might be different if we were married, but I might as well wait for hell to freeze over before we get some formal recognition of same sex couples in this country

 

[thatbum]

I don't think you need a BFA - unless you think you might turn into a complete and raving nutbag when you break up.

Westminster is spot on about this one - it seems like a lot of effort to protect your partner from yourself essentially.

If the issue is other "interested parties", then why not draw up your own "contract" just for the sake of appeasing them - I doubt many people would know the legal formalities of BFAs and would recognise its not binding. I suppose its a little deceitful but is it any of their business anyway? (And if it is do they want to pay for a formal BFA?)

 

[Terry_w]

Rebecca,

Don't forget to plan for death

e.g. property in one name and no proper will in place. Make sure you leave evidence of your relationship so that each can be easily considered spouse of the other. An affidavit kept with a will perhaps.

 

[fernfurn]

I agree that the problem is always the 'in-laws' putting in their two cents worth. If it was me I would draft a document stating your inputs in percentage terms and what you want done with the properties after break-up/death etc. and get a Justice of the Peace to sign it. Then take x amount of copies and have one each and give one to each person's trusted friend/sister/relative to hold in case so they all know/can prove what your intentions are.