Freehold vs. Crosslease Titles
This is an article from Law Link
How do ‘cross lease’ titles differ from ‘fee simple’ titles? And why does it matter? Seemingly, most property purchasers are either are not aware of the difference between these types of title, or simply do not care. Such ignorance or disregard can sometimes cost them dearly. This article aims to educate the reader of the unique considerations required when purchasing properties comprised in cross lease titles, and the potential dangers of ignoring those considerations.
Cross lease vs. fee simple titles
By way of brief overview, underlying ownership of all land in New Zealand vests in the Crown or is Maori Land. Land titles are classed by the term of their existence. A ‘freehold’ estate has an uncertain duration of tenure, whereas a ‘less than freehold’ estate exists for a certain length of time. While an owner of a ‘fee simple’ title enjoys the freedom of a full, permanent and absolute tenure in land (i.e. freehold), the tenure of a ‘cross lease’ development is generally limited to 999 years (i.e. less than freehold).
Cross lease developments evolved in the 1970s as an expedient and cheaper alternative to the traditional fee simple subdivision. Today, existing cross lease developments are very common place. When the Resource Management Act 1991 came in to effect, it included cross lease developments under the definition of ‘subdivision’, which meant that cross lease subdivisions then became subject to the same requirements (and expenses) which affect all other subdivisions. As such, new cross lease subdivisions are a rarity today.
By way of example, in a common small cross lease development containing two flats, the two buildings will be constructed on one piece of land, with each flat owner typically owning a half share in the fee simple estate. By virtue of mirrored lease documents registered on their respective titles, each flat owner then leases from both owners of the land the exclusive right to occupy their flat and the land immediately surrounding it for a prescribed amount of time (usually 999 years). Each flat owner will have their own composite title, combining their half share in the fee simple estate and a 999 year leasehold estate.
A pedestrian walking past this property could easily mistake the arrangement for two separate fee simple titles and, in practice, they are usually treated similarly. There are however some very important exceptions which anyone who owns or is considering owning a cross lease property should be mindful of.
Cross lease covenants
Leases applying to cross lease titles contain a raft of covenants with which each flat owner is bound to comply. Normal fee simple land owners are not subject to such leases and therefore are not subject to the covenants they contain. Some examples of the more notable covenants include:
A flat owner must not carry out any alterations or improvements to leased structures unless and until prior written consent is obtained from all other flat owners.
The exact dimensions of the flats being leased are recorded on a ‘flats plan’ attached to title. Technically, if additions are made to the building without being reflected on the flats plan, the flat owner does not have exclusive rights of occupation in respect of those additions.
Each flat owner must keep the interior and exterior of their flat in a good state of repair, they must not use the flat for any illegal or immoral purposes, and they must not cause excessive noise or disturbance to the other flat owner.
The respective owners may inspect each other’s flat to ensure compliance of the lease covenants.
Each owner must punctually pay all charges for water, electricity and any other outgoings relating solely to their flat.
Each flat owner must keep in place a comprehensive insurance policy for their flat.
Some of these covenants might be seen as an invasion of an owner’s rights, and may cause difficulties for prospective purchasers of a cross lease title.
Common cross lease title requisitions
Clause 5.3 of the current (2012, 9th edition) Auckland District Law Society agreement for sale and purchase provides a right for the purchaser to ‘requisition’ (or ‘object to’) title if the outline of the building on the flats plan does not accurately reflect the actual outline of the building, or if alterations to external dimensions of any leased structure have been carried out without the other flat owner’s consent. In our experience, these are the two most commonly raised requisitions when conveying cross lease titles.
If the outline of the building does not reflect the flats plan, giving rise to a defect in title, this can be an expensive problem. In order to resolve this problem, a surveyor will need to be employed to prepare and lodge a new survey plan with Land Information New Zealand. Then each flat owner and any charge-holders on their titles (such as their mortgagee) needs to consent to registration of the new flats plan on both titles. Basic examples of this exercise could cost the owner up to, and sometimes over, $4,000.
Needless to say, a cross lease title owner will not be terribly excited about paying such a significant sum to remedy what they may see as a mere ‘technical’ defect in title. If you are purchasing a property comprised in a cross lease title, it is imperative that the flats plan be examined to ensure it correctly reflects the true outline of the flat, in order to avoid a purchaser being liable for footing the bill to correct this title defect when they come to sell the property in the future.
The second common issue whereby the consent of the second flat owner was not obtained for alterations to the external dimensions of any leased structure undertaken by the first flat owner is usually easier and cheaper to resolve. Importantly, if this consent is not obtained, it is a technical breach of the lease by the flat owner who undertakes the alterations.
Typically, a reasonable flat owner neighbour will be happy to sign a document confirming their consent to the unauthorised alterations. Sometimes this consent may need to be issued retrospectively, which is certainly better than having no consent at all. The neighbouring flat owner cannot unreasonably withhold their consent to the unauthorised alterations, but they can, on good grounds, withhold their consent and become entitled to remedies under the lease if such alterations proceed without their consent.
A third, less common issue seen in our experience, is where the two registered leases significantly differ or contradict each other. Examples of this issue include where the leases grant exclusive occupation to a flat owner of the wrong flat or the wrong area, or where common usage areas are incorrectly defined. Resolving such an issue can be an expensive task. It will often involve surrendering the current lease, preparing a new correct lease and potentially a new survey plan (if necessary), obtaining consent from each flat owner and any charge-holders, and lodging the new lease and plan with Land Information New Zealand. This highlights the importance of carefully checking the terms of the registered lease.
Importantly, by default provisions in the standard sale and purchase agreement, the purchaser will have 10 working days from the date of the agreement to requisition title, otherwise they will be deemed to have accepted title to the property.
The issues discussed above are by no means exhaustive, but are surprisingly common. Other issues confined to cross lease titles also arise, such as conflicting insurance policies between flat owners in post-earthquake Christchurch. Although significant, such issues are outside the scope of this article.
This article helps to explain why cross lease titles are sometimes viewed as being ‘inferior’ to fee simple titles. People should not be concerned about purchasing a cross-lease property, but simply must exercise due caution when doing so. Your lawyer has the expertise required to prevent the above ‘worst case’ scenarios occurring at your expense.