David has been instrumental in the revision of the  Guidelines adopted by the Property Law Section of NZLS and ADLS Inc for incorporation in the latest edition of its widely used agreement for sale and purchase of real estate.

The Guidelines assist the day to day smooth running of transactions involving the sale and purchase of properties, the registration of mortgages and their subsequent discharge and relationship property protocols.

Many of the Guidelines are of a technical nature. However there is much in them that help all law firm clients - including Northlaw’s - understand the matters considered when we act in respect of property transactions. 

Here is a link to the 80 page edition of the Guidelines (updated and operating from 13 April 2015):

http://www.lawsociety.org.nz/law-society-services/law-society-branches/auckland/documents/Property-Transactions-and-E-Dealing-Practice-Guidelines-amended-April-2015.pdf

What they are and how they came about?

Cross lease titles are relatively common for residential properties in New Zealand. They emerged in the late 1960s as a way to avoid the more time consuming and, especially, costlier methods of development, like freehold subdivisions and, more recently, Unit Title developments.

Cross lease titles have two parts. Firstly the joint ownership of the whole property (usually in equal shares) as “tenants-in-common” by A, B, C, D etc.

Secondly the leases of the buildings that all the owners (A, B, C, D, etc) grant to each owner (A only) – giving that owner (A only) exclusive use of specified parts of the land and of particular buildings. Typically that would include the main dwelling and things like garages.

Where parts of the land are used by all the owners (for example driveways) these retain the underlying joint ownership status of the first part and are called “common use areas”.

The leases themselves are usually set for 999 years.

To create a cross lease title requires the depositing of a Flats Plan -to identify the buildings (and any other areas of exclusive possession) and common areas. Originally, this type of plan didn’t incur the same costs nor require the same survey standards as a freehold Deposited Plan.

With the advent of the Resource Management Act in the early 1990s Councils were able to impose more or less similar rules and costs, including Reserve Contributions as for other standard freehold subdivisions. This meant the number of cross lease developments dwindled.

However there remain more than 200,000 cross lease titles in New Zealand. It is estimated that nearly half of them are in Auckland.  Northland certainly has its share!

 

What are the problems with Cross leases?

People often don’t understand them. In 1999, the Law Commission identified that most consumers and very often real estate agents do not really understand what a cross lease title is all about. This can mean that people enter into agreements for the purchase of a cross lease property without knowing what their rights and responsibilities are. That was true in 1999 and is still the case this century.

Alterations are often carried out without the consent of the co-owner(s) of the underlying land, or any update to the flats plan to identify  the alterations. This can mean that a house extends beyond the leased area - a serious issue when it comes time to sell or otherwise deal with the property.

 

Other problems can occur when the consent of co-owners is withheld unreasonably. Then the process to challenge that withholding can finish up being substantial - and there is no compensation for the cost of dealing with the unreasonableness. In the pressure cooker environment of a sale, some unscrupulous co-owners take advantage of an opportunity to gain a financial benefit in return for granting their consent.

Another issue relates to the “legal fiction” under which the lease for 999 years has been granted. This time period was selected because all leases need to have a definite end time to be legal, and it was thought that 999 years would cope with any concerns about taking title to a lease. The reality is that all houses will need to be rebuilt  within 999 years - yet there are usually no provisions governing the rebuilding processes and any new building has to have the same footprint as the building it replaces.

There can be problems with insurance ( particularly where all the owners are not  with the same insurer) and reinstatement .

There are difficulties with the “rules” in the leases (pets, tenants, colour schemes) not being observed.

Where the Flats Plan omits areas of exclusive possession, the flat owner steps out of the flat into the underlying   “mire” of co-ownership with limited privacy and the constant danger of obstruction – a nightmare situation when difficult neighbours are involved.

 

A solution?

In 1999 the Law Commission issued a report which proposed the following 3 changes (and drafted the legislation required for them) :

  1. Prohibiting any more cross lease titles
  2. Cost effective  mechanism to convert existing cross lease titles to freehold or Unit Titles.
  3. A sunset clause (after a decade) requiring mandatory conversion then of any remaining cross lease titles before those properties could be sold. Imagine what will happen to the value of your cross lease title immediately such a clause is implemented!

The Law Commission’s recommendations have not yet been adopted. Some changes made under the Unit Titles Act 2010 allow for a conversion process suitable for larger developments with shared walls. They aren`t useful however for the typical cross lease situation where houses are separate and complex shared ownership provisions are necessary.

We are pleased to see a revitalisation of the debate   on cross leases in recent times by members of  ADLSI. In NORTHLAW’s   view  changes need to happen to avoid further  angst and expense.

In the meantime if you have a cross lease property or are considering buying one, then ensure you get proper legal advice before taking any further action.

David Roughan would be happy to discuss the issues with you and help guide you to the make the best decisions. Contact David

 

Postscript 22 July 2013 

Justice Minister Judith Collins has responded to a letter from ADLSi (which promoted the Law Commission’s report as an effective way to address cross lease issues) by saying that the Commission’s Report does not need further review, but that her officials will further investigate current cross lease issues particularly as they relate to the Christchurch earthquakes. Northlaw believes this is a small step in the right direction and hopes the investigation will open the door to eventual implementation of the Report’s recommended legislative change. Watch this space.

On 30 July 2013 David contributed to the debate on Kerre McIvor’s ZB Talk Back about the new Westpac Springboard Family Home option.

The option involves the borrower’s family taking out a loan against the equity in their family home to “top up” the borrower’s deposit.  Westpac’s website gives an example of a Springboard home loan of $75,000.

David warned that there were the following fish hooks for parents in such an arrangement:

  1. Providing the assistance might disqualify the parents from eligibility for a residential care subsidy or other government help in theThis risk might be minimised by the parents’ assistance being clearly identified as a loan, rather than a gift and, better still (although Westpac probably wouldn’t allow it) the loan being secured as a subsequent mortgage over the child’s home.
  2. Treating the assistance to the child as a loan, rather than a gift, will also protect the child in the event of a relationshipOtherwise, there is the danger of a child’s partner “double dipping” - by receiving the parent’s gift to their child plus claiming a half share from the child on a relationship breakdown.
  3. Where the parents have more than one child, they need to review theirDavid recommends the use of a “hotchpot” clause .  That will bring into account any loan or gift made by the parents to any child.  The loan or gift will then be deducted from the child’s share on distribution of the parents’ estate.  Where this doesn’t happen, other family members can be disadvantaged by their sibling receiving the same amount as they do in addition to the loan or gift.
  4. Any parent wanting to assist their child would be able to borrow on their equity from their ownIn fact, this may be a betteroption than borrowing from the same bank as the child uses.  That is because the parents mortgage to (say) ASB will “ring fence” their debt to the loan they arrange.  If the parents borrow from Westpac also, then there is a danger of them becoming liable for the child’s additional borrowing.  Using different banks is the best way to “ring fence” both the parents’ and the child’s borrowing