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.
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.