Why couples should consider signing a financial contract

When it comes to being in love, chances are you have the mentality that you and your partner will be together forever. After all, who wants to be in a relationship with someone who has an end date in mind?

The reality, however, is that not all relationships work out. And if you have joint ownership of something in the relationship — a condo, a car or even a pet — there’s potential for things to get messy in a separation. If you want to protect yourself and your assets, you and your partner should consider signing a contract that outlines what happens in the event of a breakup.

Catherine Ballantyne-Choo (full disclousre: she's my sister), 27, and Peter Felske, 30, both signed a financial contract when they got engaged in 2017 (in their case, it was a prenup). Prenups carry some negative stigma — they conjure images of greed and distrust. But for Catherine and Peter, it’s a practical arrangement. Prior to meeting, Catherine bought a condo and Peter is a co-owner in his family’s business. Since they live together in Catherine’s condo, they have a joint account for groceries, utilities, trips, and mortgage payments. With the prenup, Catherine’s condo and her individual bank accounts and Peter’s business and his individual bank accounts will not be split between the two of them. Only their joint account will be split 50/50.

Catherine says that rather than have a lawyer draft a prenup, she used an online resource that created their agreement — which was later signed off by two lawyers. It saved them a few hundred dollars.

Of course, when it comes to such contracts, the hardest part is having the conversation. It can make a partner feel insecure, untrusted, resentful and, ultimately, that the relationship is destined to fail.

First, have the talk

The first step to avoid this is to talk to your partner about finances and be transparent about them. Luckily for Catherine and Peter, the conversation was incredibly easy.

“I’m really straightforward. I put a lot of money into my condo and when we talked about Peter moving in, as much as I didn’t even want to entertain the fact that we could break up, I knew I had to be practical and protect what was mine before meeting him, because I worked really hard to save for the condo,” she says.

Peter was onboard with that.

As much as I didn’t even want to entertain the fact that we could break up, I knew I had to be practical and protect what was mine before meeting him

“I agreed with her,” he says. “I know how hard it is to afford a condo these days and it wouldn’t be fair for me to get half if we split up. The same goes for my family’s business. As a co-owner, it’s not only up to me to decide how the money is split and it wouldn’t be fair to my family if half our business went to Catherine if things didn’t work out.”

Financial contracts can be overwhelming, so getting a lawyer to sit down with you can be a helpful starting point.

The right kind of agreement

Nicholas Bala, a lawyer and professor at Queen’s University, is an expert on Family and Children’s Law. He says that when it comes to partners who plan on moving in together or getting married, they should get a domestic contract. A domestic contract for people in common law relationships is known as a cohabitation agreement.

What many couples who live together (but aren’t married) don’t realize is that a common law couple doesn’t have the same rights as a married couple, specifically when it comes to property. In Ontario, under the Ontario Family Act, only married spouses are entitled to equal property rights —  if you’re in a long-term, common law relationship with someone and you have children together, each spouse only gets to keep property that they own at the end of the relationship — there is no 50/50 split. Professor Bala’s advice to couples entering a cohabitation agreement is to be clear about expectations and know exactly how assets are divided.

“If it’s not in writing, you’re in trouble,” he says.

Vince DeMarco, associate at Niman Gelgoot and Associates LLP, says that creating a cohabitation agreement is a good idea prior to living with a partner because it sets out the rights of each person and can protect both people. If a couple lives together but the property is only in one person’s name, the partner that doesn’t have their name on the property can make a potential claim for contributions they have made, be it paying down the mortgage or rent or paying for renovations to increase its value. This claim is based on the principle of unjust enrichment, which permits recovery whenever the plaintiff can establish that there was an enrichment to the defendant, a corresponding deprivation of the plaintiff, and the absence of a juristic reason for the enrichment.

Make it official

Signing a piece of paper is not enough to have a contract be legally binding, however. Vince says that there are certain requirements for validity in the context of cohabitation agreements and marriage contracts. Both partners should have independent legal advice (their own lawyer) to review the contract, and both should provide full, frank and complete financial disclosure. Both partners must also sign the contract voluntarily. A marriage contract should be made and signed months in advance of a wedding so that each partner and their lawyer have time to review the conditions. The same applies to cohabitation agreements, in the sense that there should be time to review the conditions prior to the partners moving into the same residence.

“It’s better to be safe than sorry,” he says. “Especially if you have significant assets, you should have a domestic contract in place."

While domestic contracts aren’t exactly romantic, they can bring two people closer together.  When a couple starts talking openly about their finances, they are forced to be honest and transparent with each other about their spending habits, saving habits, and the goals they want to achieve with their money, such as buying a house or paying off debt.

They can also help work out any disagreements about money. If a couple finds their financial goals are very different, they will have to either compromise or have the opportunity to end the relationship before making a big purchase such as a house together.

With financial transparency, you and your partner will feel closer together, and if the worst case scenario does happen, it can save you a lot of money and heartache in the long run.