Could a pre-nuptial agreement protect your business?

The case recently reported as AH v BH [2024] EWGC 125 concerned an English pre-nuptial agreement intended to protect the entrepreneur husband's pre-marital wealth, primarily his business.

The parties agreed that the pre-nuptial agreement had been validly entered into, and as such the wife’s financial claims on divorce were restricted to meeting her reasonable needs.

In his Judgment, Mr Justice Peel seeks to strike the balance between, on the one hand, the appropriate weight to place on the pre-nuptial agreement and, on the other, a fair assessment of the wife’s reasonable needs.  He undertakes a review of the case law pertaining to the generosity (or otherwise) of the needs assessment undertaken in cases involving a valid nuptial agreement, and concludes that there is “latitude and flexibility available to the judge to meet the demands of fairness in cases where a [nuptial agreement] has been entered into by the parties“, and that such latitude and flexibility applies to the assessment of needs.

In this case, the parties had been married for 5.5 years, including a period of cohabitation.  At the time of the divorce, they were both 40 and they had two children, aged 2 and 4, for whom the wife was the primary carer.  The husband claimed to spend a third to 40% of his time abroad in order to run his business. The children spent 4 nights with him in every fortnight during term time and part of the holidays.  The assets at the date of trial were in the region of £50m, of which the vast majority constituted the husband’s business interest and only £291k was held in the wife’s name.

Strictly adhered to, the pre-nuptial agreement would have provided the wife with a lump sum of £818,025. Beyond this, she had a claim under Schedule 1 of the Children Act for financial provision for the benefit of the children during their minority.  The husband offered the wife £818,025 outright, per the agreement, and, by way of Schedule 1 provision, a further approx. £1.9m for housing (to be paid from the net sale proceeds of the family home and to revert to the husband when the children completed their tertiary education), child maintenance and to fund nursery and school fees.  The wife sought a transfer of the family home (worth £5m gross) to her, to be sold upon the children finishing tertiary education with each party receiving 50% of the net proceeds, as well as an income fund which, when factoring in her own limited resources and earning capacity, would provide her with £250k pa for 10 years. She also sought child maintenance and a nursery/school fees order.

Mr Justice Peel did not accept that the wife’s needs could fairly be met by the terms of the pre-nuptial agreement as reflected in the husband’s proposal. He observed that her circumstances had changed significantly following the marriage.  When the wife signed the pre-nuptial agreement, she was financially independent with her own mortgage-free home and employment.  By the time of the divorce, she was vulnerable and financially dependent on the husband.  She had sold her pre-marital property and contributed some of the proceeds towards the renovation of the family home, which was held in the husband’s sole name. She had also taken a major role in managing the renovation, and the sale of her own property had entitled the husband to claim an SDLT rebate.  She no longer had a stable independent income stream and her earning capacity had been dramatically diminished.  She had primary responsibility for the two young children which would continue for many years to come. Meanwhile the husband would be free to continue pursuing his business venture and augmenting his already substantial wealth.

The Judge was struck by the inclusion of the Review Clause in the pre-nuptial agreement which provided that, if the parties were to have children, the agreement would be reviewed. The parties did not review the agreement when either child was born. Notwithstanding that the agreement expressly anticipated a scenario where the parties had children – and made alternative provision in these circumstances – the Judge took the inclusion of the un-implemented review clause as evidence that the parties contemplated that it might not be a fair document upon children being born.

It was held that the family home should be sold and the wife would receive 56.7% of the net proceeds, which were expected to amount to £2.75m. She would receive in addition a fixed lump sum of £300k from the husband for SDLT and furnishing. These sums were to be paid to the wife outright. She would also receive an income fund to generate (in combination with her own earning capacity/resources) £110k pa for 10 years. The husband was ordered to pay child maintenance of £20k pa per child plus nursery and school fees. The wife’s award amounted to 8% of the overall assets, leaving the husband with the remaining 92% and his business intact.

Mr Justice Peel commented that the 10-year spousal maintenance term was “arguably generous” to the husband and that the wife might legitimately have sought periodical payments until the children reached 18 or finish tertiary education.  It was partly for this reason that he decided not to provide for a step-down in the wife’s housing with a proportion to revert to the husband when the children left university, and instead ordered the payment of the entire housing fund to the wife outright.

The Judgment illustrates the balancing act which underpins the needs assessment in cases featuring a nuptial agreement.  In this case, the Judge could not simply disregard the fact that the agreement had been entered into freely and with a full appreciation of its implications and this had to be reflected in the assessment of the wife’s needs. The limiting effect of the pre-nuptial agreement on the wife’s award is starkly highlighted as follows: “on a needs basis, I consider that, absent the [pre-nuptial agreement], her award would likely have been greater than I have provided for; retention of the [family home] and a longer [spousal maintenance] term (perhaps even a whole life term) would have been arguable”.  Nevertheless, the fact that the wife had surrendered her financial independence and become entirely dependent on the husband; that she had taken on primary responsibility for the two very young children now and in the long term; that she had taken steps during the marriage which, pursuant to the pre-nuptial agreement, would be to her financial detriment and the husband’s financial benefit; and that the parties had failed to review the pre-nuptial agreement on the birth of their children in line with the Review Clause, all contributed to the Judge’s conclusion that the provision made by the pre-nuptial agreement was not fair and, by extension, his decision to award the wife considerably more than the agreement envisaged.