How do ‘cross lease’ titles differ from ‘fee simple’ titles? And why does it matter? Seemingly, most property purchasers are either are not aware of the difference between these types of title, or simply do not care. Such ignorance or disregard can sometimes cost them dearly.
This article aims to educate the reader of the unique considerations required when purchasing properties comprised in cross lease titles, and the potential dangers of ignoring those considerations.
Cross lease v fee simple titles
By way of brief overview, underlying ownership of all land in New Zealand vests in the Crown or is Maori Land. Land titles are classed by the term of their existence. A ‘freehold’ estate has an uncertain duration of tenure, whereas a ‘less than freehold’ estate exists for a certain length of time. While an owner of a ‘fee simple’ title enjoys the freedom of a full, permanent and absolute tenure in land (i.e. freehold), the tenure of a ‘cross lease’ development is generally limited to 999 years (i.e. less than freehold).
Cross lease developments evolved in the 1970s as an expedient and cheaper alternative to the traditional fee simple subdivision. Today, existing cross lease developments are very common place. When the Resource Management Act 1991 came in to effect, it included cross lease developments under the definition of ‘subdivision’, which meant that cross lease subdivisions then became subject to the same requirements (and expenses) which affect all other subdivisions. As such, new cross lease subdivisions are a rarity today.
By way of example, in a common small cross lease development containing two flats, the two buildings will be constructed on one piece of land, with each flat owner typically owning a half share in the fee simple estate. By virtue of mirrored lease documents registered on their respective titles, each flat owner then leases from both owners of the land the exclusive right to occupy their flat and the land immediately surrounding it for a prescribed amount of time (usually 999 years). Each flat owner will have their own composite title, combining their half share in the fee simple estate and a 999 year leasehold estate.
A pedestrian walking past this property could easily mistake the arrangement for two separate fee simple titles and, in practice, they are usually treated similarly. There are however some very important exceptions which anyone who owns or is considering owning a cross lease property should be mindful of.
Cross lease covenants
Leases applying to cross lease titles contain a raft of covenants with which each flat owner is bound to comply. Normal fee simple land owners are not subject to such leases and therefore are not subject to the covenants they contain. Some examples of the more notable covenants include:
- A flat owner must not carry out any alterations or improvements to leased structures unless and until prior written consent is obtained from all other flat owners.
- The exact dimensions of the flats being leased are recorded on a ‘flats plan’ attached to title. Technically, if additions are made to the building without being reflected on the flats plan, the flat owner does not have exclusive rights of occupation in respect of those additions.
- Each flat owner must keep the interior and exterior of their flat in a good state of repair, they must not use the flat for any illegal or immoral purposes, and they must not cause excessive noise or disturbance to the other flat owner.
- The respective owners may inspect each other’s flat to ensure compliance of the lease covenants.
- Each owner must punctually pay all charges for water, electricity and any other outgoings relating solely to their flat.
- Each flat owner must keep in place a comprehensive insurance policy for their flat.
Some of these covenants might be seen as an invasion of an owner’s rights, and may cause difficulties for prospective purchasers of a cross lease title.
Common cross lease title requisitions
Clause 5.3 of the current (2012, 9th edition) Auckland District Law Society agreement for sale and purchase provides a right for the purchaser to ‘requisition’ (or ‘object to’) title if the outline of the building on the flats plan does not accurately reflect the actual outline of the building, or if alterations to external dimensions of any leased structure have been carried out without the other flat owner’s consent. In our experience, these are the two most commonly raised requisitions when conveying cross lease titles.
If the outline of the building does not reflect the flats plan, giving rise to a defect in title, this can be an expensive problem. In order to resolve this problem, a surveyor will need to be employed to prepare and lodge a new survey plan with Land Information New Zealand. Then each flat owner and any charge-holders on their titles (such as their mortgagee) needs to consent to registration of the new flats plan on both titles. Basic examples of this exercise could cost the owner up to, and sometimes over, $4,000.
Needless to say, a cross lease title owner will not be terribly excited about paying such a significant sum to remedy what they may see as a mere ‘technical’ defect in title. If you are purchasing a property comprised in a cross lease title, it is imperative that the flats plan be examined to ensure it correctly reflects the true outline of the flat, in order to avoid a purchaser being liable for footing the bill to correct this title defect when they come to sell the property in the future.
The second common issue whereby the consent of the second flat owner was not obtained for alterations to the external dimensions of any leased structure undertaken by the first flat owner is usually easier and cheaper to resolve. Importantly, if this consent is not obtained, it is a technical breach of the lease by the flat owner who undertakes the alterations.
Typically, a reasonable flat owner neighbour will be happy to sign a document confirming their consent to the unauthorised alterations. Sometimes this consent may need to be issued retrospectively, which is certainly better than having no consent at all. The neighbouring flat owner cannot unreasonably withhold their consent to the unauthorised alterations, but they can, on good grounds, withhold their consent and become entitled to remedies under the lease if such alterations proceed without their consent.
A third, less common issue seen in our experience, is where the two registered leases significantly differ or contradict each other. Examples of this issue include where the leases grant exclusive occupation to a flat owner of the wrong flat or the wrong area, or where common usage areas are incorrectly defined. Resolving such an issue can be an expensive task. It will often involve surrendering the current lease, preparing a new correct lease and potentially a new survey plan (if necessary), obtaining consent from each flat owner and any charge-holders, and lodging the new lease and plan with Land Information New Zealand. This highlights the importance of carefully checking the terms of the registered lease.
Importantly, by default provisions in the standard sale and purchase agreement, the purchaser will have 10 working days from the date of the agreement to requisition title, otherwise they will be deemed to have accepted title to the property.
Proceed with caution
The issues discussed above are by no means exhaustive, but are surprisingly common. Other issues confined to cross lease titles also arise, such as conflicting insurance policies between flat owners in post-earthquake Christchurch. Although significant, such issues are outside the scope of this article.
This article helps to explain why cross lease titles are sometimes viewed as being ‘inferior’ to fee simple titles. People should not be concerned about purchasing a cross-lease property, but simply must exercise due caution when doing so.
Your lawyer has the expertise required to prevent the above ‘worst case’ scenarios occurring at your expense.
Purchasing a Cross-Lease Property in NZ - Things to Look Out ForFebruary 23 2017
Background to NZ cross-leasing
Historically, cross-leasing was one of the two most common ways that a property could be subdivided. A cross-lease creates two layers of rights – rights of ownership, and rights of use. Cross-leasing was originally created to avoid minimum rate area subdivision restrictions in the Municipal Corporations Act 1954 and under District Schemes. The Resource Management Act 1991 made significant changes with the distinction between cross-leases and subdivisions, and new cross-leases are now less common than previously.
What is a Cross Lease?
A cross lease is where multiple individuals own an undivided share of land, which they build on, with the land being leased from the other owners (often for a term of 999 years). This is commonly used for townhouses or flats, although most new developments no longer use this system. There are important considerations for buying cross lease property, as the joint ownership of the underlying land creates limitations and increases the checks that you will need to do before purchasing. Selling a cross lease property also requires extra care, as it can really complicate the sales process if there are problems with the flats plan.
How does a cross lease work in New Zealand?
The underlying fee simple title to a cross-lease property is owned jointly by the owners of each flat that exists on it. These owners – as a group – then lease parts of the land back to individuals in the group. The leases create rights of exclusive use and enjoyment for each flat and rights in respect of common areas including maintenance. The areas leased and the perimeters of buildings are detailed on what is known as a Flats Plan. The leases and Flats Plan are registered with LINZ. There are usually rules within the lease dealing with the use and maintenance of any common areas, such as driveways.
Marty, Sarah, and Jason own three cross-leased properties: Flat A, Flat B, and Flat C, on 100 Star Street.
Marty, Sarah, and Jason together own all the land on 100 Star Street, with each of them having a one-third share in the fee simple estate of the land. This means that each of them owns one third of the whole land, and not any specific part of the land.
Marty, Sarah, and Jason (as a group) then lease out flats on parts of the land to each of themselves individually. The group leases Flat A to Marty, Flat B to Sarah, and Flat C to Jason. Each of these leases gives the owner of the flat exclusive rights to the use and enjoyment of that flat.
When Marty, Sarah, or Jason sells their property, they are actually selling their one-third interest in the underlying fee simple and their interest as lessee in the lease of their particular flat.
Unlike fee simple properties, the leases constrain the extent to which owners can use their property and make alterations to them.
An example of a flats plan for a cross lease property
Steps to Take When Purchasing a Cross-Lease Property in New Zealand
- Ask the vendor of the property about their relationship with the neighbours. Having a positive relationship with surrounding flat owners is more important in a cross-lease situation than others because any changes an owner makes to the flat (externally) must be consented to by the owners of the other flats. If the neighbours are difficult to deal with, you will likely find that putting a garage or deck on the property to be trickier than expected (see below).
- The contract for the purchase should include a title condition. This will allow you to obtain legal advice on the status of the title, how the lease works and the obligations between the flat owner and the owners of the other flat(s).
- Check the Flats Plan and the layout of the property. Because the title of cross-leased properties indicate the layout, shape and dimensions of the flats, it is imperative that the external dimensions of the flat you are purchasing is correctly recorded on the title plan. If not, the title is defective. Correcting such a defect is expensive and time-consuming, as a surveyor must take measurements of the property and issue a new title plan, which also requires the consent from owners of the other flats. In total, correcting a simple defect, such as a connected garage not being on the plan, could cost around $15,000.00 to correct and require a process taking three months to complete.
- Check that any structures not connected to the flat, such as a garage or deck, have been consented to by the owners of the other flats. Any construction on the leased areas must be consented to by all owners of the other flats. If a garage or deck has not been consented to formally, the owner of the flat is exposed to a future claim demanding that the structure be pulled down at the flat owner’s expense, or pay a heavy sum for the neighbours to consent to the existing structure. In practice, owners that do not get formal consent (perhaps because they have a good relationship with their surrounding flat owners) expose future owners of their flat to the risk that owners of the same surrounding flats will demand the structure be pulled down (i.e. if there is an unrelated neighbourly dispute).
- Be familiar with the limitations on use of the property imposed by the lease. Your neighbouring flats will be subject to the same restrictions.
- Be familiar with your and your neighbours’ obligations in respect of common areas (e.g. shared driveways) including contributions to maintenance.
If you’re looking at a cross-lease property, then get in touch to make sure you’ve got everything covered.