Henry Hood and Eri Horrocks discuss separation agreements and examine the case of Horohoe v Horohoe in STEP Journal

This article was originally published in STEP Journal and can be found here. 

Separation Agreements

A separation agreement formalises an agreement between separating spouses[1] concerning the financial basis on which they have separated or intend to separate.

Most separating spouses resolve their financial arrangements within divorce proceedings, meaning their financial settlement can, subject to the court’s approval of its terms, be enshrined in a court order, rendering it final and binding.

However, some separating spouses choose not to divorce: some for religious, cultural or emotional reasons; those married for less than a year are not eligible for a divorce; others may be unsure whether their separation is permanent; and some may wish to take advantage of the tax or other financial benefits (e.g. under a pension plan) of retaining their married status. Some people in these situations may choose to obtain a decree of judicial separation[2] or, where circumstances permit, a decree of nullity[3], which would allow binding orders concerning the parties’ financial arrangements to be made, but this is rare. Absent such proceedings, separating spouses who do not divorce cannot obtain a binding court order reflecting their overall financial settlement.

Whilst separation agreements are not binding, they will generally be upheld by the court in the event of subsequent proceedings, making them a good option for separating spouses who do not wish to divorce but seek clarity in respect of their financial arrangements. However, as illustrated in the recent case of Horohoe v Horohoe [2020] EWFC 102, they can also create difficulties if made without full financial disclosure supported by asset valuations and specialist legal advice.

The law

Separation agreements are a type of nuptial agreement, as are pre-nuptial and post-nuptial agreements: all set out the agreed financial consequences of the breakdown of the marriage. However, whilst pre- and post- nuptial agreements are made in the context of an ongoing relationship to address the hypothetical possibility of marriage breakdown, a separation agreement is made after the marriage has broken down.

Two strands of caselaw therefore apply to nuptial agreements – that relating specifically to separation agreements, following Edgar v Edgar [1980] EWCA Civ 2, and that relating to nuptial agreements more broadly, following Radmacher v Granatino [2010] UKSC 42.

In Edgar, the Court of Appeal held, in the context of a separation agreement, that formal agreements, properly and fairly arrived at with competent legal advice, should not be displaced unless there are good and substantial grounds for concluding that an injustice will be done by holding the parties to the terms of their agreement.  Relevant factors were identified as being Undue pressure by one side, exploitation of a dominant position to secure an unreasonable advantage, inadequate knowledge, possibly bad legal advice, an important change of circumstances, unforeseen or overlooked at the time of making the agreement.

In Radmacher the Supreme Court held that the court should give effect to a nuptial agreement that is freely entered into by each party with a full appreciation of its implications unless in the circumstances prevailing it would not be fair to hold the parties to their agreement. In practice this means:

• Neither party must have entered the agreement under pressure.
• The parties will generally be considered to have had a full appreciation of the agreement’s implications where each has had independent specialist legal advice and there has been full disclosure of the parties’ financial positions. In some cases (as illustrated below) parties will be considered to have the necessary appreciation even where these are absent.
• It will not be fair to uphold an agreement which would leave one party unable to meet their needs whilst the other would be comfortably provided for.

There is much overlap between the Edgar and Radmacher approaches. In practice, separation agreements may be given more weight than pre- or post- nuptial agreements as they are made with knowledge of the financial and other circumstances existing at the time of separation. The Court of Appeal in Zimina v Zimin [2017] EWCA Civ 1429 described this as a qualitative difference between separation agreements and other nuptial agreements, and held that both the Radmacher and Edgar tests should be applied to separation agreements. 

Horohoe v Horohoe

Mr and Mrs Horohoe married in 1994 when neither had any significant financial resources. During the marriage the husband, a carpenter, developed successful construction and property development businesses; the wife worked as a nurse and assisted with the businesses. By the time they separated in 2010, they jointly owned two companies through which the husband traded and a number of investment properties.

The parties (who were Catholic) did not divorce on separation, but assisted by their financial advisor, they negotiated and substantially implemented a financial settlement. It provided for their cash to be divided equally and for each to take the properties they wished to retain. The companies were transferred to the husband; neither party believed they had any value.

In 2019, the wife filed for divorce and sought further financial provision. By this time her assets were worth £1.6m and those of the husband £12.5m, two-thirds of which was the value of the companies. The wife argued that it would be unfair to hold her to such an unequal division of the assets.

Citing both Edgar and Radmacher, the judge was satisfied that the agreement should be upheld, save that an adjustment was required to reflect the parties’ common misunderstanding, in 2012, that the companies had no value: in the language of Edgar there was inadequate knowledge; in the language of Radmacher they did not have a full appreciation of the implications of the agreement.

The judge considered that the necessary adjustment was a payment to the wife of £600,000. This was calculated taking into account the company’s value in 2012, the wife’s preference at the time for secure rather than risk-laden assets, and that the wife had been advised – by a lawyer she saw once for an hour – to consider the value of the companies but had not done so.

Following this adjustment, the wife would have assets of £2.2m and the husband £11.9m; an outcome the judge held was justified both on the basis of the 2012 agreement and because some of the husband’s wealth had been generated after the separation. The judge commented that had there been no separation agreement, the wife would have received substantially more.

Note that had the parties negotiated their initial financial settlement in the context of divorce proceedings and enshrined their agreement in a court order, the wife would not later have been able to seek further provision. Whilst orders can be set aside on the basis of a common mistake, the applicant must be able to show that they could not, with due diligence, have established the true facts when the order was made.

Horohoe illustrates the benefits and risks of separation agreements. The essence of their agreement was upheld, despite the minimal legal advice, reflecting that the court endeavours to respect parties’ autonomy. Had they instructed specialist lawyers and valuers at the time of the initial agreement they may well have avoided re-visiting the terms on divorce.

Tips

Private client practitioners should keep in mind the following when advising clients who are separating:

• Separation agreements can be a good option for those who do not want to divorce but want some level of certainty as to their financial future. However, the security of a binding court order cannot be achieved without divorce proceedings (or proceedings for judicial separation or nullity).

• Parties should expect to be held to a separation agreement and should not anticipate being able to seek further financial provision in the event of a later divorce.
• Specialist family law advice combined with full financial disclosure is essential to ensure the client understands the value of their potential claim and the implications of the agreement. This will also increase the likelihood of the agreement being upheld.
• The agreement is unlikely to be upheld if it does not enable each party to meet their financial needs.
• Those with international connections who may divorce abroad in the future should take advice on the treatment of separation agreements in the relevant jurisdiction.

Overall, clients must understand the significance of a separation agreement, and should treat the negotiations just as seriously as negotiations for a financial settlement within divorce proceedings.

[1] References to marriage, spouses and divorce include civil partnerships, civil partners and dissolution. Although separation agreements can be entered into by couples who were never married, the applicable law is different and is not considered in this article.

[2] Which formalises the separation without dissolving the marriage.

[3] Which annuls a void or voidable marriage.