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Cross Leases– Flat owning

Keys to a cross lease property

In the second of our series of blogs on real estate terminology, we discuss the differences between the various exceptions to the usual Fee Simple property. Under our land transfer system, land is divided up by survey plans which are registered and form part of the jigsaw that makes up New Zealand landholding. Certificates of Title are generally available where they comprise all of the land in one or more lots subject to minimum lot sizes. With the freehold title you have ownership of the property and the only constraints that you have are those imposed by the general law for example District Plans and the Building Act 2004.

Flat owning companies

Many years ago the device of a flat owning company evolved to overcome minimum subdivision requirements. The company owned all the land and title, and shareholders of the company derived occupation rights in respect of their apartment from a licence to occupy from the flat owning company. When someone wanted to sell, they transferred the shares and a new occupation licence was granted. There are still many examples but the practice is no longer used in new developments.

The major problem was they were difficult to borrow against. The legal interest an owner had was as a shareholder in the company, not in the land as the land was owned by the company. Banks were reluctant to lend on the security of a mortgage of shares, and although loans could be arranged the amount that could be borrow was limited.

Flat owning companies still exist and tend to operate without too many difficulties. License agreements can restrict use of units, but often a greater extent than the rules of body corporate developments.

Cross leases

Cross leases evolved as a means of overcoming the security deficiencies of flat owning companies. The whole of the land is owned by all of the owners and they have a joint interest in the fee simple certificate of title. As joint owners they then typically enter into 999 year leases of their respective flats with all the owners as lessors and the particular owner as lessee. Formal flat plans are prepared and registered on the leases and define the buildings exclusive areas and common areas. Again and distinct from fee simple titles owners are subject to the terms of their leases and the potential exists for disputes with co-owners. They are a very common form of land ownership and in practice operate without too much difficulty. Issues can arise where alterations are made to buildings such that the “as built” differs from the flats plan. The problem usually arises on sale when alterations do not accord with the flat’s plan, are picked up by a purchaser, and the costly exercise of correcting the flat plans needs to be worked through. Particular care needs to be taken when purchasing cross lease properties both in terms of reviewing the “as built” and the terms of the lease.

Unit title developments

Unit Title developments are now the invariable means of structuring intense residential development. They are governed by the Unit Titles Act 2010. Unit titles can accommodate Strata developments with different owners owning the same area on different levels. Separate titles for each unit are defined by unit plans which give both horizontal and vertical dimensions. Distinct accessory units such as car parks and garages remote from the principal unit can be accommodated within the same title. Each unit title development has a body corporate the members of which comprise all of the owners. Matters such as insurance and exterior maintenance are looked after by the body corporate with the cost being levied against owners based on what are known as unit entitlements. Unit entitlements are assessed by a valuer at the outset based on relative values of units so that cost get a portion by way of levy with the more valuable units paying more. Units are subject to body corporate rules and it is important that you are aware of restrictions that will apply to you, that you would not have if you are purchasing a fee simple title. For example pets may be excluded or there may be restrictions on the colour of curtains. Inner city apartments and townhouse developments invariably will be unit titled.

Understanding the restrictions that apply to different titles

When looking for properties to purchase you should be aware that if you are looking to purchase a property that is not a fee simple title, you will need to make a little more enquiry as to possible restrictions that may apply. As is usually the case, getting legal advice beforehand is more valuable than legal advice afterwards.