Cross-leases were first conceived in the 1950s as a way to circumvent the subdivision restrictions at the time. It wasn’t until the 1970s that stand-alone buildings were able to be leased and their popularity exploded at the same time as mullets and shoulder pads. However just like those luscious locks and shoulder padded tops, the benefits of these 1970s phenomena have well and truly run their course. Cross lease titles are now quite problematic, and are likely to continue to be phased out in the future. However cross-lease titles are still very common with residential property in New Zealand. Following attendance at an NZLS CLE seminar hosted by Joanne Chilvers and Anthea Coombes on cross-lease titles, there are useful practical warning signs to watch out for when confronted with a cross-lease property.
The legal basis behind a cross lease is that owners of the cross lease title all own an undivided share in the fee simple of the property. But they also take on a leasehold interest (usually for 999 years) for a building and often a specific area that is for their exclusive use. There may also be common areas noted in the lease.
Is it defective?
As most people in the property industry know, any structure on the property that does not appear on the flat plan should be a warning flag. But the ADLS agreement limits what a party can actually requisition on a cross lease title under clause 6.3 of the agreement.
Clause 6.3(1) provides that a cross-lease title can be requisitioned in two circumstances:
Firstly, “alterations to the external dimensions of any leased structure” are requisitionable. Clause 6.3(b) goes on to specify that “alterations” in this context refers to alterations that are “attached to the structure and enclosed.” Therefore structures that are not attached, not enclosed, built on an exclusive use area, and erected with the lessors consent are arguably not requisitionable.
Secondly “buildings or structures not intended for common use which are situated on any part of the land that is not subject to a restricted user covenant” can also be requisitioned. For example, we would recommend that our client requisitions a title where a carport had been erected on the common area, but was clearly only for use by one of the owners.
While a defect on a title may not be requisitionable, the same defect might prevent a purchaser from obtaining insurance and/or finance. Agreements to purchase defective properties have frequently been cancelled on this basis rather than being requisitioned.
The lease document
The flat plan is essential for determining the boundaries of each unit within the property. However equally as important are the actual leases over the cross lease properties. As a reminder, each owner under the cross lease has a lease over their particular area/dwelling for (usually) 999 years, and as an undivided owner of the fee simple, are the lessor (with the other owners) under the other cross lease properties leases.
Because the building and exclusive use area is leased from the fee simple title, the owner of each unit has certain obligations to adhere to. The terms of each owner’s lease are set out in a lease instrument that is registered on the title to the property, and each lease is registered on each of the properties titles within the cross lease development.
Because many cross leases were created from the developer’s own fee simple home, some of these might create favourable terms for one property over another. A prospective purchaser’s lawyer should investigate all lease instruments within a cross lease development as a part of their due diligence. Particularly they should check what the rules are surrounding maintenance of the exterior units, insurance requirements, consent requirements for alterations, and the process for dispute resolutions.
Many lease instruments appear quite uniform, but small amendments can greatly affect each owner’s rights and obligations. When answering questions about a property, no assumptions should be made regarding the property owner’s obligations without first consulting the lease instrument or vendor’s solicitor.
By way of example, following the recent REAA complaint C15806, an agent was fined $1,000.00 and required to undergo further training for incorrect advice in relation to a cross lease property. The agent advised prospective purchasers that a cross lease property required consent from the other owners for any additional structure which might alter the title. The actual terms of the lease provided that consent was required for the erection of any unit or structure regardless of the effect on the title, meaning the purchaser could not complete their planned improvements.
In the case of a defective cross-lease title, parties might want to start considering the effect that this has on the value of their property, and whether it is worth converting to fee simple titles. The costs of conversion including council fees, legal fees, and surveying costs can be well in excess of $10,000.00, and even more if special council requirements are triggered. The effect of a defective title on a property’s marketability might make this option more common in the future.
Another option would be to carefully draft a provision into the agreement which provides for the title being defective, and limiting the purchaser’s right to cancel or seek a price reduction on this basis. However as mentioned, finance and insurance issues may still arise.
When advising purchasers that a title may be defective, we usually advise against confirming the agreement where possible, unless they are aware of the defect, and have set their purchase price and agreement terms accordingly. The next time you are concerned about your client’s cross lease title, contact our specialised residential property team for expert advice.