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PLEASE NOTE: This article was published on the date listed below and may now contain information that has since been updated or changed. We have retained this article as it may still contain helpful comments. However, we advise you to make an appointment to see us for the most up to date information on this topic.

April 2001

Cross-Leasing Potential Problems?

The expression "cross-lease" is commonly used in the property market, but many people do not have a full understanding of what it means or what exactly it involves.

Cross-leasing is the term used to describe the situation where there is more than one separately owned dwelling built on a single section. The dwellings are often referred to as "home units" or "town houses".

Normally there are just two such units on a single section, but there are instances where there may be up to five or six units on one section, each unit under individual ownership.

Typically, each of the three dwelling units has a different owner – e.g. Black, Brown and Smith. Each of the three units has a 999 year lease granted to it and registered against all the individual Certificates of Title. The effect of this is to give Black, Brown and Smith exclusive rights of occupation and ownership of their respective units.

The whole section is freehold and is owned by Black, Brown and Smith in equal shares, subject to the three 999 year leases in favour of each individual unit owner.

As well as specific areas of exclusive possession cross-leased properties usually contain "common areas". The common area in this instance is the drive that gives all three owners access to their individual units. This common area is part of the freehold section and is owned jointly by Black, Brown and Smith. There are no exclusive rights to the common area. Instead, each of the owners will enjoy rights to drive over and use the common area. Maintenance of the common area is usually the responsibility of all owners, although the leases will need to be checked to make sure.

The 999 year leases are usually expressed at a nominal or "peppercorn" rental of say, 10 cents per year. Different leases provide for different maintenance, repair and access matters. They may also contain prohibitions on certain types of use. If the units on the section are adjoining and depend on each other for support, the lease may provide for that right of support.

Adding or altering buildings on cross-leased properties

Problems may arise on a cross-lease Title when additional buildings are constructed or existing buildings are altered.

The reason that this may cause difficulties is that a cross-lease is technically the lease of the unit on the property and not the whole area of which the owner has exclusive possession. At the outset, before a cross-lease can be entered into, a flat plan has to be approved by the local authority pursuant to the Resource Management Act. The flat plan will then be deposited at the Land Titles Office, and forms part of the Certificate of Title. The flat plan shows the outline of the dwelling units subject to the cross-lease and the position of the units on the property.

If, at a later date, the dwelling unit is altered or extended or an additional unit (a garage for example) is constructed on the property, then that extension or alteration or addition will not be shown on the original flat plan and will therefore not be subject to the cross-lease.

Most cross-leases stipulate that no additions or alterations to the exterior of the units are allowed without the consent of all the other owners of the freehold. Moreover, even some internal alterations require the consent of the other freehold owners in some cross-lease documents.

In either case, we would recommend that you contact us to discuss any alterations or additions first, so that we might advise you which is the best course of action.

Problems with Cross-Leases

Cross-lease owners who have extended their buildings or made alterations to them can experience considerable problems if they do so without first seeking legal advice.

Buildings may have been constructed in accordance with requirements of a local authority, but local authorities do not require compliance with cross-lease provisions before issuing a building consent.

The result is that, while an alteration or addition may be "legal" from the local authority’s point of view, there is no lease in existence for such alterations, additions or extensions. In many situations this information only becomes clear when the owner decides to sell the property. A prospective purchaser who checks the Certificate of Title and leases will discover that in effect, the additions to the dwelling or the extra buildings have no right to be there.

At this point the purchaser will more than likely require the matter to be corrected, which will involve the co-operation of all the other owners of the cross-leases on the section. This will cause delays and substantial costs and will turn what should be a straightforward transaction into something far more costly and difficult.

Conclusions

If you are an owner of a unit or town house on a cross-lease section and you are considering alterations or additions or the construction of an additional unit, check the situation with us first. If you are thinking about purchasing a unit or townhouse on a cross-lease, make sure that before you sign any Agreement to purchase, you have seen the registered flat plan to check that it shows accurately the outline of all the buildings and their placement on the section.

By contacting us first we can save you a great deal of worry and cost further down the track.