Risks of buying a cross lease property

February 2020

In Auckland there are over 100,000 cross lease titles. This form of property title is poorly understood and this blog reveals what you get with a Cross Lease. It also exposes the risks and problems with buying a cross-lease property and the steps you can take to protect yourself.

Warning: Buyers keen to purchase cross-lease property must surround themselves with property and legal experts to ensure that costly pitfalls are avoided.

Contact me for a free due diligence checklist for buying a cross lease property.

Why are cross leases so common in NZ?

Cross leases were a common form of property ownership for home units and townhouses dating back to the 1960’s. Cross-leases were popular because they were not considered to be a subdivision and so the developers could avoid Councils’ expensive subdivision requirements. This all changed when the Resource Management Act came into effect. Today, Unit titles are commonly used for most new multi-unit developments.

What is a Cross Lease?

The underlying fee simple title to a cross-lease property is owned jointly by the owners of all the flats (houses, apartment or units) that exist on it. These owners then lease parts of the land and buildings back to individual owners, often for a term of 999 years. In a cross lease, you own a share of the freehold title in common with the other cross leaseholders and a leasehold interest in the particular area and building that you occupy.

When buying a cross leased home unit or house you will usually get:

1. An undivided share in the total section

2. A lease or cross lease of your unit or house

3. The exclusive use of the land around your unit or house as shown on the flats plan

4. The shared right to use areas marked "Common Area" on the flats plan

What is a Flats Plan?

The cross lease creates rights of exclusive use and enjoyment for each flat and this is recorded on the Flats Plan which you will find with the Record of Title (previously known as Certificate of Title or CT). The areas leased and the perimeters of buildings are found on the Flats Plans. However, some early cross leases do not have any exclusive or common areas marked on the plan and all of the land is common area for use by all owners.

The leases and Flats Plans are registered with LINZ. The flats plan is sometimes referred to as the deposited plan or a cross lease plan.

What is included in Cross Lease rules?

There are usually rules within the lease which all owners must comply with. These may include rules relating to:

· the use of any common areas, such as driveways

· maintenance of common areas and fences

· restrictions on pets; working from home; renting the property

· causing a nuisance to other owners - not cause excessive noise or disturbance

· insurance for fire - or to pay a share of the premium on a joint policy

· the building of additions or alterations without the other owners’ consent

· payment of the annual rent if requested - usually 10 cents

· changing the exterior colours

· dangerous goods or devices. This can affect gas cylinders for cooking or heating

· maintaining the property in good condition and repairs to the interior and exterior

· shared responsibility for exterior maintenance where the flats are part of one building

· how you can use the property. Cannot be for any illegal or immoral purposes

· owners rights to inspect each other’s flat to ensure compliance with the lease rules

· the payment of all charges for water, electricity and any other outgoings

· paying the rates, which are usually separate for each flat and abide by local body and government requirements

· how disputes between owners will be resolved. This is usually through arbitration

Making alterations to a Cross Lease property

When the owner of a property with a cross lease title wants to make any additions to their home (that are fully attached and enclosed) and involve extending the footprint of their property, they must do 3 things:

1. Obtain the written consent from all the other owners involved in the cross lease

2. Obtain the approval and consent from the Council to make the change

3. Update the flats plan with LINZ

It is common for property owners not to be aware of the need to update the flats plan with LINZ and this can cause the title to become defective.

What is a defective title ?

When buying a cross lease property the flats plan must accurately reflect the footprint of the building at the property. If there are alterations to a house that are not shown and the footprint is now different - the flats plan is considered defective.

A Bank will not lend on a defective cross lease title and if the other owners’ titles are also defective it can be a very expensive and drawn out matter to rectify. The options for the property seller are:

· to pay their lawyer to obtain the retrospective consent of the other cross lease parties and to arrange for the flats plan to be redrawn to match the footprint at the property and to lodge the new flats plan with LINZ

· negotiate a reduction of the purchase price with the buyer and pass on the responsibility of fixing the flats plan to them

In certain circumstances, the buyer can object to a cross lease title on the grounds that the flats plan is not accurate. This is called “requisitioning the title” and allows the buyer the right to cancel the agreement if the seller does not agree to rectify the title.

Disputes

Disputes often arise between cross lease property owners when owners do not read, understand or abide by the cross-lease rules. Examples of common disputes include:

· when owners, tenants or friends park where they shouldn’t and block access

· one owner wants to make additions and other owners object

· when owners want to change the colour or cladding of the outside of their home

· trees on the cross-lease property are blocking views, creating shade or dropping branches

· maintenance is not undertaken

· garden sheds are installed

· smells and noise

· drainage problems

Problems arise when buildings come to the end of their natural life. Cross leases do not address rebuilding. These issues are compounded when cross leases were created with buildings of different ages as not all flats will need to be rebuilt at the same time.

Can a cross lease title be converted to a fee simple title?

When the flats plan needs to be updated to reflect additions, it is sometimes better to convert fully to a fee simple title. This has the advantage of sole ownership of your property, and the rights to use that land as you like. The process can be long and expensive. The property needs accurate surveying and dividing up according to the original cross lease terms. Boundary lines, utility supply and access rights need to be established. Remedial work may need to be done.

All the other owners in the cross lease and all banks with a registered interest must agree to the change of title. Banks will charge their clients for new mortgages which will be registered against the new fee simple title.

Most Councils will view this as an existing situation as no buildings are being added. They can still impose subdivision requirements where they feel it’s critical. Services may need to be checked, separated and or upgraded to meet current standards. The vehicle crossing or shared driveway may also have to be upgraded.

Although this can be costly, upgrading a cross lease title to fee simple will generally increase the value of a property and make it easier to sell. It also makes it easier for the owner to make alterations as they don’t have to seek the consent from other property owners.

Buyers need support

Unless buying property is something you do every day, you need experts who are 100% on your side and committed to helping you get what you want. Exclusive Buyers Agency does just that. We work exclusively for the buyer.

For a free due diligence checklist for buying a cross-lease property contact me now.

Lorraine Burns

Buyers Agent - Licensed (REAA 2008)