Modern families: Considerations for cohabitation agreements

When I speak with clients and friends, many are surprised to learn that unmarried couples in British Columbia can have the same rights and responsibilities as married couples. For example, under British Columbia’s revamped Family Law Act (FLA), couples living together in a “marriage-like relationship” for two years or more are treated the same as married couples when it comes to the division of family property.

This can have enormous implications for the property, debts and other assets accrued during a relationship (and the increase in value of property brought into the relationship) if a couple parts ways.

With Statistics Canada estimating that more than 20 per cent of relationships in the country are common law, it is crucial for unmarried spouses to know their entitlements and responsibilities and how to best protect their interests.

What is a cohabitation agreement?

Under the FLA, married and unmarried spouses often have a right to half of all property, assets and debts accumulated during cohabitation if the relationship breaks down. Every relationship is different, and you and your partner may not want to share everything 50-50 for several reasons. Perhaps one party is entering the relationship with an established business or significant debt, or a couple wants to keep their bank accounts separate as they adopt different investment strategies.

Like a marriage agreement (sometimes referred to as a “prenup”), a cohabitation agreement is a legally binding contract that can outline, among other things, how assets and debts will be distributed if an unmarried couple separates.

A cohabitation agreement can be drafted at any point during a relationship.  The scope of the agreement can relate only to a single item (for example an investment property, business, or student loan) or can relate more generally to all family property between the parties. Spousal support obligations in the event of a breakdown of a relationship can also be referenced. The purpose of a cohabitation agreement is to stipulate if and how the FLA will be adhered to, amended, or wholly altered in the event of a breakdown in a relationship.

Prior to drafting a cohabitation agreement, we meet with the client to discuss their needs, goals, and intentions for the agreement. The client will then provide complete financial disclosure to ensure the thoroughness of the agreement in the context of the relationship. We then work with the client to create a draft agreement, discussing their rights and responsibilities arising out of the agreement at each stage, before providing the draft to the other party.

Once the agreement is drafted, the other party retains independent legal advice to review the agreement. Their lawyer will advise them of their rights, responsibilities and liabilities (for example, entitlements they may be waiving by signing) and often after some negotiation, both parties sign the contract.

Discussing a cohabitation agreement with your partner might be a tough or awkward conversation, but it is important. The end goal of a cohabitation agreement is not to unfairly prevent the other party from receiving a portion of property. Instead, a well-drafted cohabitation agreement aims to provide clarity and certainty for a couple based on their mutual understanding and intentions on how their family property and debt would be divided in the event of a breakdown in the relationship. This allows parties to make financial decisions throughout the course of the relationship with confidence knowing that they are on the same page.

If you live with or plan to move in with a romantic partner, here are some considerations to discuss with your family lawyer.

Protect the value of a pre-existing asset

If you have pre-existing assets when entering into a relationship a cohabitation agreement can assist in protecting the value each of you bring to the relationship. This can avoid conflicts over valuating property that either party held prior to the relationship if a separation was to occur later.

Although any pre-relationship property is considered excluded property under the FLA, any increase in value is generally considered family property. That could be a considerable amount in today’s soaring real estate market. For example, if one party owns an investment property at the start of the relationship, which at the time is valued at $300,000, and during the course of the relationship the value increases to $600,000, under the FLA the increase of $300,000 would be considered family property with each party entitled to half.

In some relationships that outcome may be more than acceptable. However, the party who owned the investment property from the outset, and who is solely contributing to mortgage payments during the course of the relationship, may wish to look for ways to retain any increase in value in the event of a separation. A cohabitation agreement is a tool that can assist.

Under the FLA, fairness will dictate entitlement; there is no guaranteed 50/50 split. If you and your partner have lived together for three years, your ex probably would not receive half of an increase in the value of a company you own, especially if they were not involved in the business. That said, a cohabitation agreement can clearly set out what will happen in a way that provides certainty and fairness to both parties.

When drafting a cohabitation agreement, your lawyer can work with your accountant, business advisor and other professionals to provide a proper valuation of the asset in question. A business valuation can be costly but, depending on the nature of the business, it may be vital to ensure that the other party who might be waving a potential entitlement is fully informed.

Dispute resolution

Another valuable aspect of a cohabitation agreement is that it can also include a clause concerning how disputes or changes to the agreement will be handled. For example, if you and your ex have a conflict over the agreement later, it gives you a pathway to resolve disputes outside of a courtroom. For example, the agreement can stipulate that mediation is required before one party can take the other to court. By addressing how a conflict will be handled at the outset, a cohabitation agreement gives a couple the peace of mind that they will try and work together in good faith to avoid costly litigation.

Review and update

Like marriage agreements, cohabitation agreements are not bullet-proof, and courts can amend or throw out portions of the agreement if there was non-disclosure, for example. Frequently, failure to disclose is not intentional but rather something that was overlooked or improperly described or valued in the agreement. That is why it is important that an agreement be drafted with the assistance of one of our experienced lawyers.

It is also important that a cohabitation agreement reflects the current circumcentres of a relationship. If an agreement becomes outdated, in that it no longer reflects the current circumstances of the relationship (ie. the parties have moved cities, bought and sold real estate, or started a new business) then there is the chance that it could become less enforceable. By reviewing your cohabitation every three to five years (and updating after a significant change in the relationship) you and your partner can confirm that it remains accurate, fair, and depicts both of your current intentions.

If you have questions about cohabitation agreements and would like to explore your options, please contact one of our lawyers.

*This post is not intended to be legal advice and should not be taken as such. Please contact McConnan Bion O’Connor & Peterson if you have any questions regarding this post or require assistance or legal advice regarding a cohabitation agreement.