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/ 24 Mar 2014

Binding pre-nups: what now for the market?

In recent weeks the legal world has been talking about The Law Commission’s report, Matrimonial Property Needs and Agreement, which includes a draft Bill which would make prenuptial agreements binding. What are the implications of these proposals for the legal market and practitioners?

London has to date been reputed as the ‘divorce capital of the world’ in view of generous financial settlements made by courts upon divorce. Many jurisdictions already recognise prenuptial agreements and England and Wales may soon follow suit, reflecting interesting shifting attitudes. The present law does not recognise prenuptial agreements as binding. In the landmark Supreme Court decision in Radmacher v Granatino the legal weight of such agreements was strengthened significantly as they were likely to be upheld if not unfair. Nonetheless, their application still falls subject to judicial scrutiny, as fairness of terms must be considered on a case by case basis. Hence this remains a difficult area for practitioners to advise upon as they are unable to guarantee couples that the terms of their agreement will be mirrored in court orders.

Historically deemed as unromantic and a practice of celebrities and the ultra high-net worth, prenuptial agreements are now increasingly used by couples seeking financial autonomy. In many cases however it is simply a way for the financially dominant party to limit any damage they would otherwise suffer on divorce. The recent recommendations have introduced the concept of ‘qualifying prenuptial agreements’, enabling couples to enter into enforceable agreements subject to preconditions being met. The legislative seal on prenuptial agreements is widely welcomed by the industry, as it will pave the way for greater financial control and certainty for couples given the unpredictability of judicial discretion. Binding agreements would also save excessive costs and avoid exposing couples and their families to the acrimony of burdensome litigation.

Statistically 42% of married couples in England and Wales see their relationship end in divorce and therefore the changes could be sweeping, resulting in a surge in instructions firms receive to draft prenuptial agreements. In the current economic climate couples will be particularly mindful to safeguard their wealth, ring fence future inheritances and existing assets and make provision for children. In fact, the newfound significance of such agreements may persuade couples previously dissuaded by financial exposure of marriage to tie the knot.

If prenuptial agreements become binding there will be increased pressure to ensure that the agreement is absolutely right for the client. Practitioners must ensure they take sufficient detail and consider all angles. They must be extremely specific and ensure that the agreements are carefully tailored to clients’ individual circumstances. It is testing to cater for all possible future scenarios such as illness, housing needs, changing asset values, income loss and future children. Further, ensuring clients are adequately protected involves negotiation and careful consideration of the fairness of the agreement and the implications arising from the clauses contained therein. It is often not until parties start discussing the detail via their solicitors that differences between them become clear. Further, what may appear fair at the point of entering an agreement may transpire to be unfair in the light of a change in circumstances that could not necessarily be predicted. These agreements are often fraught as the discussions can easily undermine the personal relationship that the parties are hoping to seal.

Furthermore the Bill proposes that prenuptial agreements should be signed no more than 28 days before the marriage or civil partnership. This can present a challenge to practitioners when clients start to seek legal advice only a few months before their wedding, particularly if the parties do not have a clear idea on terms, if a disclosure exercise is required and the agreement drafted is particularly complex. Time must be taken into account, prior to completion, to allow clients to be fully and comprehensively advised and for negotiations as to the terms of the agreement to be completed. Despite working in a timely manner, it may be that firms have to work hard to realistically manage clients’ expectations of the time required to complete this work and to dispel the myth that many clients seem to have that such agreements can be drafted within a matter of days with limited work being undertaken.

Understandably many clients will want to have a clear idea of the cost implications before proceeding with a prenuptial agreement. Despite that fact that prenuptial agreements are often considered to be an area where a fixed fee can be offered, with this sort of work it is very difficult to predict the time that needs to be spent. Cases and clients can vary so much and sometimes a fixed fee is simply not going to be appropriate. Nevertheless, with other pressures caused by legal aid cuts to family work and the new ABS models coming into the market we are likely to see more firms offering clients fixed-fee prices. The challenge to law firms is to fix such prices at a competitive level yet ensure that they are still able to turn a profit on what can often be very labour intensive work. It is important that in adopting competitive fixed fees firms ensure that the agreements produced are drafted thoughtfully and carefully and that the client is fully advised on its repercussions. Everyone involved wants to avoid future litigation and lawyers need to be very aware that their advice and drafting may well be scrutinised by fresh legal eyes on any future divorce. It is important therefore that practitioners follow correct procedures, such as producing detailed written advice, spending time thoroughly advising on the implications of getting married with and without a prenuptial agreement and ensuring that they have sought to advise on all foreseeable issues. Unfortunately the difficulty is that it is impossible to crystal ball gaze to predict what the parties’ financial circumstances will be in the future and what the actual implications of the prenuptial agreement will be at the time of separation. Parties therefore must fully understand that in signing the prenuptial agreement they will be bound by its terms and that such terms, whilst are likely to be considered fair enough for the agreement to be upheld, may be very far indeed from what they would have been awarded in the absence of the agreement.

Liz Francis, family Partner at Hanne & Co, observes ‘there has been a gradual increase over the years in the number of clients seeking prenuptial agreements. The agreements being drafted are becoming more and more sophisticated and detailed with parties prioritising certainty in the future and the preservation of their current personal wealth over the possibility of marrying without such an agreement. These agreements need to be given a lot of thought and are not something that can be churned out at a press of a button.’ It remains to be seen whether the passing of this Bill will result in practitioners being inundated with requests for prenuptial agreements and if so how they will respond if judicial discretion is ousted and the financial fate of clients lies in their hands.

This article is written by Emel Djevdet and Sehaj Lamba who are a Solicitor and Trainee Solicitor respectively within the Family Department at Hanne & Co.

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