BINDING FINANCIAL AGREEMENTS – FREQUENTLY ASKED QUESTIONS
- Reasons you might want to enter into a binding financial agreement:-
- What is the process involved in obtaining a BFA?
- What should be included in my BFA?
- Do I have to disclose my entire financial position as part of this process?
- Why can’t I just prepare my own BFA and get it witnessed by a JP?
- How long does it take to obtain a signed BFA?
- What’s the difference between a BFA and consent orders?
- What about the similarities between consent orders and binding financial agreements?
- Why would you choose a BFA over consent orders, or vice versa?
- Other reasons you might obtain a BFA even though you haven’t separated.
- Why are BFA’s more expensive than Consent Orders?
- What are some of the other legislative requirements necessary to ensure my BFA is legally binding?
- What if we sign a BFA but then decide we don’t want to abide by it anymore?
Reasons you might want to enter into a binding financial agreement:-
- You have significant assets that you wish to protect in the event of a separation.
- You have significantly more assets than your partner.
- You have children from a previous relationship and wish to ensure that family wealth is passed on to them.
- You have a special needs child that you wish to ensure is protected in the event of a separation.
- You would like some certainty in relation to your financial position in the event of a breakdown in your relationship.
- You are concerned about a debt of some significance being brought into the relationship.
What is the process involved in obtaining a BFA?
In essence there are probably six steps:-
- We take instructions from you about what to include in your BFA. We give you advice about things you’ve likely not thought about and get instructions about those matters as well.
- We draft the BFA and send it to you to have a look at.
- Once you’re happy with it, it goes to your partner’s solicitor so your partner can discuss it with his or her lawyer.
- Amendments to the draft are made if required.
- Each party receives independent legal advice on the agreement as drafted. If you instruct our office, that advice will always be in writing.
- The parties sign off on the agreement and the solicitors sign documentation verifying the independent legal advice provided.
What should be included in my BFA?
The most common theme that arises in BFA’s is that there is a quarantining of assets that have been accumulated by each party prior to the commencement of the relationship, or a restriction on each party’s ability to share in assets accumulated by the parties individually prior to the commencement of the relationship. However other things that the parties might wish to incorporate include the following:=
- Whether income and wages will be combined, or kept separate.
- Who will pay what bills each week or each month etc.
- How you will own property that is purchased by you in the future, ie: individually, jointly, or in some particular percentage or portion.
- Spousal maintenance.
- The division of liabilities incurred prior to the commencement of the relationship.
- The division of liabilities incurred during the course of the relationship and whether they are incurred jointly or separately.
- What might happen in certain scenarios, or what, from the above might change in certain circumstances, ie: following the birth of a child or children, or if one party loses their job or becomes incapacitated for employment.
- How jointly owned property will be divided in the event of a separation.
As well, the BFA should have a detailed list of the property, assets, liabilities and financial resources, together with their values, that each of the parties has, both separately and jointly, as at the date of the binding financial agreement.
Do I have to disclose my entire financial position as part of this process?
It is essential that both parties disclose accurately their entire asset and liability position, including superannuation, as part of this process. A failure to do so can (although it won’t necessarily) lead to a BFA being overturned and set aside at a later date. A prudent solicitor will ensure that not only does each party fully disclose their financial positions including values for all assets and all liabilities owned and owed, but that they provide documentary evidence of the values being put forward. This is so, notwithstanding that the parties may be happy with the estimates of assets they’ve agreed to. So for a house, a market appraisal might be sufficient. For a business, an estimate provided by the business owner party’s accountant might suffice. Again, if an asset is heavily undervalued at the time that the BFA is entered into, there is a risk that the agreement might be open to being overturned at a later date. Disclosing values at the time the BFA is being negotiated and entered into avoids this becoming an issue at a later date.
Why can’t I just prepare my own BFA and get it witnessed by a JP?
A Binding Financial Agreement is essentially a contract between two parties. It is legally binding, the same way as an arms’ length contract between two professionals is. Once signed, it is very difficult to avoid having to comply with it and the other party can generally have it enforced if necessary. For these reasons, both parties to the BFA are required, pursuant to the legislation, to have independent legal advice in relation to it. This is a mandatory requirement and a failure to obtain independent legal advice will render the agreement unenforceable and of no legal effect.
As well though, BFA’s are technical documents that need to be prepared carefully. There are also statutory requirements in relation to their preparation and execution which again must be adhered to if the parties expect it to be legally binding.
How long does it take to obtain a signed BFA?
It is often the case that the drafting of the BFA itself is not what takes all the time. Sometimes there are negotiations between the parties that can take time, even though they had previously discussed the agreement before seeing a lawyer. BFA’s are complex documents and it is often the case that the parties have not had regard to everything that needs to be considered before they talk to their lawyers.
It is also regarded as good practice for each party to have plenty of time to properly consider the BFA and particularly the independent legal advice that they receive in relation to it. For a number of reasons, lawyers who do this sort of work will generally suggest that the parties should have around 28 days as a rule of thumb to properly consider the advice they’ve received before signing off on a BFA.
So whilst theoretically, the timeframe for obtaining a BFA from the time the first party instructs their lawyer to prepare the document to the time it gets signed might be fairly short, for a number of reasons, you should allow at least six weeks for the process to take its course. Often, the process will take longer, depending on the circumstances of the case and the complexity and level of detail required in the document.
What’s the difference between a BFA and consent orders?
The two documents are quite different in terms of their layout, but there are two significant differences otherwise:-
- The Court has to approve proposed consent orders and won’t make orders in accordance with the agreement reached unless satisfied that the terms are fair and reasonable having regard to the circumstances of the case. As against this, BFA’s are a contract reached between the parties, and that contract is not court approved. They don’t have to be fair and reasonable, and indeed sometimes they are not.
- Consent orders can only be made by a court following the parties having separated on a final basis. By contrast, a binding financial agreement can be made at any stage, that is, before the relationship has commenced, during the relationship, or after it has broken down. There is far more flexibility in this sense then in a binding financial agreement as against consent orders.
What about the similarities between consent orders and binding financial agreements?
Both BFA’s and consent orders can be used by married couples and by de facto couples. BFA’s and consent orders can be used by opposite sex or same sex couples.
Both documents are legally binding and have the same force and effect as if a court had made orders in accordance with the provisions of the BFA or consent orders following on from a contested hearing.
Except in certain, fairly specific circumstances, neither can be set aside unless by agreement between the parties. If one party wants to see the consent orders or BFA set aside, they have to approach the court and make an application to have the consent orders or BFA set aside. The reasons why the court might set aside a BFA are different to the reasons that a court might set aside consent orders.
Why would you choose a BFA over consent orders, or vice versa?
The main reason why people look to obtain a BFA is because consent orders are only available once parties have separated. A BFA can be prepared and signed in the lead up to a marriage or de facto relationship, during a marriage or defacto relationship, or following the breakdown of a marriage or de facto relationship. So if parties wish to oust the jurisdiction of the court and to make their own arrangements in relation to the division of their assets in the event of a future breakdown in their relationship, then a BFA is the only way that this can be done.
Consent orders are however generally preferable in the event that a relationship has already broken down. This is because both the law and the interpretation of the law in relation to binding financial agreements is not yet settled, so whilst lawyers draft BFA’s to the best of their ability and so as to ensure their enforceability based on current legislation and caselaw, there is a risk that changes in the law will lead to differences in how BFA’s are enforced at some future date. This uncertainty does not arise with consent orders. Whilst both documents can, in theory, be overturned or set aside in certain circumstances, the law with respect to the setting aside of consent orders is quite settled so there is less risk associated with drafting consent orders than BFA’s, at least for the time being.
One other thing to be aware of is that consent orders can deal both with the division of assets following a breakdown in a relationship, but also the future care arrangements for any children of the relationship. A binding financial agreement can only deal with property matters. So if a couple separates, it would make more sense in most instances to agree to consent orders, addressing both parenting and property matters, rather than have a binding financial agreement addressing property matters and consent orders addressing parenting matters.
The only other reason why a BFA following separation might be preferable to consent orders would be if the parties were concerned that a court might not make the orders they’d agreed to because they were unfair or unreasonable having regard to the circumstances of the case. A BFA would overcome this problem, as it doesn’t need to be fair.
Other reasons you might obtain a BFA even though you haven’t separated.
Sometimes adult children encourage a parent who is re-partnering to enter into a BFA out of concern about how that parent’s estate might be divided. Entering into a BFA can provide some protection in relation to that parent’s assets against a possible claim by the parent’s new spouse or partner in the event of a separation.
Also, if a business partner is married or in a defacto relationship a BFA can also help or protect the other business partner or partners in the event of a breakdown in the former’s relationship. It can avoid the business and the other partners from being drawn into potential property settlement proceedings in the event of a separation.
Why are BFA’s more expensive than Consent Orders?
In general, you will likely find that solicitors charge more money to prepare binding financial agreements than to prepare consent orders. This is because in general, there is more work associated with a BFA than consent orders. Good practitioners who understand BFA’s will provide a very detailed, written letter of advice in relation to a BFA, and the document itself will be carefully drafted to account for future scenarios that may or may not arise. Binding financial agreements can be more complex than consent orders, mostly because if they are drafted whilst the parties are together, they will try to provide for future scenarios, whereas consent orders operate on the basis of just one scenario, being the one that currently exists.
What are some of the other legislative requirements necessary to ensure my BFA is legally binding?
It is essential to the enforceability of a BFA that all the legal and legislative requirements have been met. For example:-
- The agreement must be in writing and refer to the correct section of the Family Law Act.
- The agreement must be signed by both parties.
- Before the BFA is signed, both parties must have obtained independent legal advice.
- The lawyers who provide the independent legal advice must give advice about specific things, and must also then sign a certificate stating that advice was given about specific things.
- A copy of the certificate signed by each lawyer must be provided to each party.
What if we sign a BFA but then decide we don’t want to abide by it anymore?
If both parties agree that they don’t want the BFA to apply anymore, they can enter into what is known as a “Termination Agreement”. This must be signed by both parties. Once this is done, it essentially discharges the terms of the BFA. They can then enter into a new BFA if they want to, or just leave things as they are.
A binding financial agreement can’t just be updated. If the parties decide that the BFA needs to be changed, they need to sign off on a Termination Agreement and then sign a new Binding Financial Agreement.
These are things that we will be talking to you about and the agreement will take into consideration future scenarios that may or may not arise.