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.
In 1999 the Law Commission issued a report which proposed the following 3 changes (and drafted the legislation required for them) :
- Prohibiting any more cross lease titles
- Cost effective mechanism to convert existing cross lease titles to freehold or Unit Titles.
- 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.