Today as the coronavirus keeps us isolated, huddled in our homes, fearful of venturing too far or thinking too deeply, we cannot long ignore the pandemic’s impact on contractual deals that we made when we thought we understood the present and even banked on a better tomorrow.
At the Centre for Mediation and Dispute Resolution, we are dedicated to helping people and businesses to resolve issues with reason and understanding of the facts at their disposal and the options available. This article will discuss Separation Agreements. Focusing on the division of assets, we will consider couples who are divorced, as well as those who are separated pending divorce. In doing so, let us imagine that both groups of couples have reached a “deal,” but that their settlements have now been impacted by the pandemic.
Here are some examples:
What if an Agreement contains a buyout of one spouse’s interest in a family business with the sum based on a valuation of the business taken in 2019? And to further complicate the picture, let us assume that the buyout payment is scheduled to occur in 2020. In this illustration there is no provision for a decrease in value at the time of the payment. After all the time span between the valuation and the actual payment is relatively close.
However, what if this business is a restaurant or a gymnasium or any number of businesses that now face an uncertain future?
Does anyone believe that its value is the same now as it was in 2019?
Will it recoup its lost value in 2020? No one really has the answer.
What can be done?
If the couple is divorced, the buyer spouse may have no recourse. A deal is a deal, the agreement survives as structure unless there were provisions in the Agreement for value adjustment in the event of change of circumstances. If, however, the couple is not divorced, the playing field can be altered. Certainly there are persuasive arguments to be made for the impact of a significant change in circumstances. Perhaps the couple will agree to hold off on payment, hoping for regeneration of worth. Perhaps they will agree to sweeten the deal by including terms for increased payment if, over time, the value is greater than the original valuation. Or perhaps the couple may decide to hold the asset jointly, until “worth” may be accurately assessed. Or perhaps, there will be another trade in assets or in support as compensation for a revised deal.
What if the division of retirement funds is based on a set sum, to be paid by one spouse to the other and the account has undergone a significant decrease? Or what if the couple has traded retirement funds for the marital home? Currently the retirement savings will in all likelihood have taken a much greater hit than the real estate. But then again, things may change. Maybe the real estate market will experience a similar downturn. Maybe the low mortgage rates and the low inventory will not be enough to sustain a market if unemployment remains high and risk aversion to major purchases becomes commonplace. Here again if the deal has been struck and the couple is divorced, a modification is not in the offering. For those involved in negotiations or who have not been to court, the opportunities for change are still present. Here creativity may help to structure a different settlement. Perhaps the couple can change the retirement division to a percentage rather than a sum or change the sum to include provisions for increase/decrease of funds. And with the house/retirement exchange, perhaps here too there is room for change. Division of assets in a down or volatile market is always a tough choice. The inclusion of contingencies in the agreement for decreased or increased values taken at a later date may present a viable alternative.
Businesses and retirement funds are not uniquely affected in this economically depressed pandemic time line. Most assets will experience downward slides in value or at least be temporarily depressed. Even bank accounts, the most resilient of all assets will not have the investment return that they enjoyed in prior years. Certainly a deal based on an unequal division of stock and bond holdings are impacted, not to mention commercial real estate and on and on.
Mediation as a Vehicle for Modification:
Here, as in so many other areas of divorce, mediation offers couples the opportunity to demonstrate that they, as “thinking and feeling “ individuals, understand that the present circumstances are of neither party’s making, that an unforeseen and unthinkable event has occurred and has changed hard fought, acceptable deals into untenable agreements. Here they may rise to the occasion of being willing to work together to try and fix, in the short term or long term, the inequities of their settlement. Even divorced couples that have no recourse by court filing for modification may find that here and now, former partners may be open to collaborate in redressing issues.