To the untrained eye, a property with a cross lease title can look just like a property with a standard “fee simple” title. It’s easy to assume that you can just occupy your bit of the land and all will be well.
As a result, many prospective purchasers sign contracts to purchase cross-lease property without realising the implications. This can lead to unexpected expense and even difficulty in selling the property later.
So it’s worth knowing more about cross-lease titles before you sign.
In New Zealand, the most common form of title is a freehold or “fee simple” title. If you have a freehold title, you generally own the land and everything built on the land and no time limit applies to your ownership.
By comparison, if you have a cross lease title, you own two interests:
• a share of the freehold title (together with at least one other owner)
• a leasehold interest in the particular area and building that you occupy.
The lease will usually be for 999 years for a “rent” of a nominal amount like 10 cents per year (which people often don’t ask for). Each of the owners will have a lease registered on their title. Those leases should mirror each other.
A cross lease title will also include a plan called the “flats plan”. This plan shows:
• the part of the property that is solely yours to occupy and use
• the parts of the property that only the other owners can occupy and use
• any areas that all the owners share (“common areas”).
We recommend that you read the lease really carefully because it’s likely to contain restrictions that you will need to comply with. Remember it’s actually shared property. What you do affects your fellow owners.
Common restrictions include:
• If you want to make structural improvements or alterations to your building, you have to get the written consent of the other owners in advance.
• The flats plan is the definitive record of what’s yours. If you make additions to your building that are not recorded on the plan, that is a “defect in title”.
• All owners must keep the interior and exterior of their buildings in good condition.
• You mustn’t cause excessive noise or disturbance to the other owners. This includes your pets – some leases specify that you mustn’t own a pet that could disturb the other owners. Barking dogs are the most obvious example.
• Each owner must pay all charges like rates and water that relate to their building and must have a comprehensive insurance policy in relation to their building.
Fixing problems can be pricy – if it’s possible at all
As well as checking the lease conditions, we also recommend that you check the flats plan carefully to make sure it matches the physical location of the property you are looking at and that you are clear about which part of the land can only be accessed by which owner.
The most common and expensive issues with cross leases arise when there’s a defect in title – that is, the footprint of the building doesn’t match the flats plan.
To fix a defect in title, you need to engage a surveyor to prepare a new flats plan, and lodge the plan with Land Information New Zealand. Each owner (and any charge-holder like a bank that holds a mortgage) also needs to consent to the new flats plan.
The new plan has to pass muster with the Council as well – including meeting any current building conditions, such as firewall standards. Getting Council agreement can be tricky and time consuming, and it’s not always possible to fix things in the way that they require.
Fixing a defect in title can cost owners $10,000 or more. That’s a nasty additional expense if you have to pick up all or part of that tab. There’s also the hassle of negotiating with fellow owners.
It’s not a step that we’d recommend you skip either. If you want to sell your property later, a smart prospective buyer – or their smart lawyer – will discover the problem. A defect in title often puts buyers off altogether. After all, they’d be taking on the burden of fixing the problem including negotiating with other cross-lease owners whom they don’t know. Even if they’re still willing to buy, they’ll ask for a price reduction, to cover the cost of remedying the problem.
So make sure you talk to us before you sign your agreement for sale and purchase. We can discuss the title with you, check the lease terms and make sure that there are no unexpected surprises for you in the future.
Image credit: “Stevenson’s wire fence” (State Library of Queensland; Wikimedia Commons)