The Trouble with Cross Leases

The Trouble with Cross Leases

The kiwi dream is purportedly to own your own quarter acre section. Wikipedia helpfully includes an entry comprising two paragraphs.

In Australian and New Zealand English, a quarter acre is a term for a suburban plot of land. Traditionally, Australians and New Zealanders aspired to own a 3- or 4-bedroom house or bungalow on a section of around a quarter of an acre (about 1,000 square metres), also known locally as the Australian Dream or the New Zealand dream. The land was frequently put to use with vegetable gardens, fruit trees, or lawns for family recreation.

Unless you live in provincial New Zealand the dream of a quarter acre section with a 3 – 4 bedroom home is exactly that, a dream. Quarter acre lots in cities gave way to 600m2 lots and now it is not uncommon to have lots sizes under 300m2. As land demand increased and compliance became more robust new forms of land ownership were created including unit titles, company shares and cross leases.

Cross lease titles were a nifty piece of Kiwi ingenuity devised as a cheap alternative to subdivision. The allowed development by avoiding restrictive planning requirements but decades on, these properties are regularly causing headaches for lawyers, prospective purchasers and vendors alike.

The legal structure behind a cross lease is not easily explained but I will do my best. Cross leases allow multiple parties to own equal shares in land. On the land there are multiple houses (called “flats”). The original owners agreed between themselves who would live in each flat and which areas of the land could be used by each party and for what pursposes. This was documented in the leases. They are called cross lease lease because each owner leased one flat and part of the land to the other owners. The leases also set out further terms of the arrangement, such as shared maintenance obligations. This shared ownership structure creates limitations on how each owner can use the property.

Some of the key pitfalls that can arise include:

• Additional structures – Any structures not connected to the flat (sheds, decks, fences, etc.) require formal consent from the other flat owners. The other owners can demand that any unconsented structure is taken down.
• Flat alterations – If renovations are carried out that alter the outline of the flat so that it no longer matches the flats plan attached to the title, then the title is defective. This is usually an expensive and time-consuming issue to fix and may affect bank lending for potential purchasers.
• Insurance – Often the owners will use different insurers for each of their flats and damage to one flat may require the input of the other owners and their separate insurers. This can create disputes and delays when it comes to settling insurance claims, as was discovered by many cross lease owners following the Canterbury earthquake. Coordination between insurance companies is also required for any damage to common areas.
• Shared Areas – In my experience areas that are shared (such as driveways) often give rise to disputes. Notwithstanding the terms of the lease owners may misuse these areas to the detriment of other owners.

Cross leases still serve as an affordable alternative to fee simple ownership, often helping first home buyers onto the property ladder, especially in an increasingly competitive market. However, prior to purchase, consideration should be given to the restrictions that come with this type of ownership structure and careful scrutiny of the title should be undertaken by a lawyer before signing an agreement.

Contact the Team today about any of your Cross Lease questions