Understanding Cross Leased Property
Prior to the enactment of the Resource Management Act 1991, crosslease properties were a popular form of ‘subdivision’ as they avoided the higher costs and stringent requirements of the Council regarding subdivisions. However, owning a crosslease property is slightly more complicated than owning a freehold title (where the owner has permanent and undefined tenure of their interest in that fee simple title).
When you own a crosslease property, essentially each crosslease owner owns a share of the underlying fee simple title and then the crosslease owners lease back to each other the exclusive use and enjoyment of the flats on the land. The usual period of the lease is for 999 years.
The Certificate of Title of the property will also include a Flat Plan which shows the area of each flat, as well as the common areas (areas that may be used by all owners, such as a shared driveway), and restricted areas (areas that are for the private use of each owner, such as a garden).
Due to the property being leased, the rights of each owner to use or alter their Flat will depend on the terms of the lease. Such terms can be found in the lease instrument that will be noted on the property’s Certificate of Title.
Adam, Ben, Cathy and Daniel are owners of the crosslease property – 123 Smith Street. They each own a ¼ share of the whole of that property’s underlying fee simple title. The group leases Flat A to Adam, Flat B to Ben, Flat C to Cathy, and Flat D to Daniel. Each owner has the exclusive right to use and enjoy their Flat and their associated garage. All owners have the right to use the shared driveway and common courtyard. Should Ben decide to sell Flat B, he sells his ¼ interest in the underlying fee simple and then his interest in the lease of Flat B.
However, cross leases can come with issues. Cross lease owners and real estate agents may not fully understand them and follow the terms contained in the lease. Owners may have altered their property without their neighbour’s consents and not had the flat plans updated for instance. This can cause major issues for the vendors when they try to sell the property or for the new property owners who have bought at auction without fully investigating if consent has been attained and are then left with trying to get retrospective consent and the expense of updating the flat plan.
Therefore, it is extremely important that potential buyers have their lawyer conduct due diligence investigations for them before they lock themselves into a purchase.
Issues to be aware of when purchasing a crosslease property:
- The Agreement for Sale and Purchase should include a title condition. A title condition is standard in the commonly used Auckland District Law Society Agreement under clause 5 but any Agreement should be checked that it has not been excluded. The title condition is very important for all properties but even more so for crossleases as it allows the purchaser to have their lawyer look over the title and related lease documents to check for accuracy and any issues.
- If you have already signed an Agreement for Sale and Purchase, you can object to the title for the Flat Plan being defective within the timeframe specified in the Agreement (under Clause 5.1 this is usually 10 working days from the date of the Agreement being signed). Clause 5.2(3) specifies the process that must then be taken:-The vendor will have 5 working days after the purchaser’s notice of defect to say whether they are unwilling or unable to rectify the defect (called a ‘Vendor’s Notice’).-If the purchaser does not notify the vendor that they waive the requisition within 5 working days of the Vendor’s Notice, either party may give notice to the other that they are cancelling the contract.-If the vendor does not provide a Vendor’s Notice within the timeframe above, the vendor is deemed to have accepted the requisition and must rectify it before settlement. The purchaser will receive back any deposit or other monies paid but is not entitled to receive reimbursement for checking the title from the vendor.Alternatively, the vendor could negotiate with the purchaser as to what will occur (such as that the purchaser will update the Flat Plan but the purchase price will be reduced accordingly, or if the vendor does not defective title, the purchaser may cancel the Agreement.
- Checking the lease instrument is important to determine the extent of the restricted and common areas and what rights and obligations each owner may hold in relation to the different areas of the property. For instance, common areas such as shared driveways may be used by all owners due to that part of the land being owned jointly but will also require the cost of maintenance to be contributed to by all. Drainage and other such shared amenities may also require all owners to contribute to repairs and maintenance. Understanding the restrictions and obligations that come with the property before buying it is very important.
- The purchaser should ask the vendor what their relationship is like with the other cross lease owners as if the relationship is negative, putting in a new deck may be harder to get consent for.
- Potential purchasers should go to the property to check that the layout and dimensions of the flat on the land actually matches the delineation of the flat on the Flat Plan. If there have been any alterations, removals or additions and these are not recorded on the Flat Plan, this is an issue as the title is defective.Such alterations, if not consented to by the other cross lease owners, may affect the common or restricted areas and the owner may not have leasehold title to them. The offending owner will then be in breach of their lease if the consent of the owners is not sought and the Flat Plan not amended. As a purchaser, you would want this sorted out before purchasing the property but gaining this consent can be hard and having the plans updated expensive.
- The purchaser should also check that any extensions or structures that have been connected to the flat (like garages or decks) have had the formal consent of the other crosslease owners. (Informal consent, such as a friendly ‘yes’ from neighbours across the fence is not enough to prevent future objections should the relationship ever breakdown). If formal consent has not been achieved, the flat owner is at risk of having the other owners demanding that the structure be taken down or that the owner pay the other owners as compensation for their ‘consent’.
Defective Cross lease title
For vendors facing an issue with a defective title due to their Flat Plan not reflecting the current shape or footprint of the buildings, the vendor should aim to correct the title. To do this, the vendor should have a crosslease plan that accounts for the new additions or alterations of the building redrawn by a surveyor and then deposited with the Land Registry Office. Alternatively, the vendor could surrender the crosslease altogether and have a new and accurate crosslease registered. However, this process is time consuming and costly and will involve gaining the consent of the other owners which may be difficult depending on their views of the alterations.
Another option, but one that is possibly even more time consuming and expensive, is to convert the crosslease to a fee simple title. Again, the other cross lease owners must agree to this and as the conversion process is akin to a doing a subdivision, the consent of the local council will also be required. Such a conversion has implications for such things as ensuring that the property still has vehicle access, that any service lines are separated or even upgraded as required, and that any development requirements of the local Council are adhered to. This may mean that the council’s modern requirements for driveway widths and building upgrades are required. Although such a conversion is expensive, money will have to have been spent on updating the title plans anyway and upgrading to a fee simple title can increase the value of the property and even make it more sellable.
Altering a crosslease property and/or dealing with earthquake insurance claims
As crosslease properties involve multiple owners, dealing with your property is made more complicated. If you want to make additions or other alterations to your flat, or you want to repair, rebuild or accept a cash settlement and sell the property on an as is where is basis, you need their consent from the other owners in the cross lease. This is because what you do to your property affects theirs.
This can be particularly problematic regarding the settlement of insurance claims, where each owner has their own insurance policy to deal with and may have different ideas on what they wish to do with it. This is even more so where there is damage to shared structures. Some owners may have different strategies for repair in mind or may not wish to apply the funds to repair or rebuild their home. Some may be wishing to redesign their flat during the repair process such that major structural changes will be made or the external dimensions of the flat will change. For all such alterations that are likely to alter the Flat Plan, it is vital that you get your neighbours’ written and informed consent before you begin. If you do not, you may breach your lease, your title may become defective (which is a big issue when you come to try and sell it), and your neighbours may be able to force you to get rid of the unconsented to alterations.
Again, if you intend to accept a cash settlement from EQC and/or your insurer but do not intend to repair or rebuild with those funds, you must be aware of the terms of your lease as your neighbour may have the right to legally require you to repair or rebuild.
Remember that if you do take the money and do not apply it to repairing or rebuilding the property, this may cause issues when you come to sell, unless you sell it as an as ids where is property.
Crossleases are a more complicated form of land ownership due to the involvement of multiple parties. As a potential purchaser, it is vital that you obtain legal advice on the crosslease title and associated lease documents in order to gage your potential rights, obligations and the issues involved with the property. As an owner of a crosslease who intends to sell or modify their property, it is highly important that you discuss your options with your lawyer so that you do not face legal action from neighbours or run into difficulties should you decide to sell your property in the future. The members of our experienced property team here at Saunders & Co will be happy to advise you on your cross lease matters so please view our website for contact details.