Cross-Leases. What are they and what implications do they have?
Historically, cross-leases were a popular form of dividing land for land owners. This is because owners could avoid certain subdivision restrictions and would gain similar results to a formal subdivision under the existing Act, but at a fraction of the price. However, since the Resource Management Act 1991 was introduced, the requirements have increased (with the inevitable costs) resulting less use of this option.
What is a Cross-Lease?
A cross-lease is where multiple individuals own an undivided share of land and a lease for part of the land/building. For example, if the property is divided into three separate segments, the owners will usually own an undivided 1/3 share in the land. Each owner of the land may then erect a building on their allocated segment of the land. This building will then be leased back to them (often for a term of 999 years) and recorded on the certificate of title (“title”).
The leases that are created for the owners may record a “right of exclusive use and enjoyment” for each building and often the associated yard. This affords the owners of the relevant building under the lease the right of exclusive use of that segment of land and the building without interference from the other owners.
Along with these rights of exclusive use, the lease specifies rights and responsibilities in respect of “common areas” (i.e. driveways, shared lawns or parking spaces) which apply to all owners, and often include the shared repair and maintenance obligations of these areas.
Unlike a freehold property, how you maintain and develop a cross-lease property is restricted and connected to the rights of the other owners. The level of restrictions can vary depending on the lease. Common examples of the restrictions other leasehold owners can impose are:
- limitations on alterations to the external dimensions of the dwellings or structures on the property;
- restrictions on household pets;
- a responsibility to maintain common areas; and
- limitations on the scope of the colours and materials you may apply to the external features of your house.
Therefore, if for example you would like to renovate and change the external dimensions of your house, you must seek out written agreement from all other leasehold owners as well as amend the plan to the property. If you do not, the other owners may be able to seek remedies such as reversing the renovations.
Buying a cross-lease
When buying a cross-lease property, you need to weigh up the limitations of the lease against your intended use and/or development of the property and buildings to ensure you can fulfil these obligations. With a cross-lease property, it is also important to clarify the boundaries for the exclusive use and common areas on the property. While most exclusive use and common areas are well marked on the flat plan and by fences or grass/concrete, some properties are not so clear or all grounds/yards are shared, which can cause disputes between owners.
Selling a cross-lease
If you are selling your cross-lease property, you should be aware that if the dimensions of the dwellings on the property do not accurately reflect the dimensions of the property recorded on the flat plan attached to the title, a purchaser can raise an objection; this is called “requisitioning the title”. If you do not agree to amend the title (which can cost significant amounts of money), the purchaser has the right to cancel the sale and purchase agreement.
You should not be scared-off by cross-lease properties. However, understanding some of the finer points of cross-leases will be extremely beneficial for you. If you are buying, renovating, selling or converting (into a fee simple title) a cross-lease property, we recommend that you seek our advice prior to entering into an agreement or commencing any renovations.