The Deficiencies of Cross Leases

There are over 216,000 cross lease titles in New Zealand, nearly 50% of which are in Auckland. This form of shared ownership is not governed by specialist legislation and reform was mooted in 1999 by the Law Commission to address the shortcomings of cross leases and to allow conversion to fee simple titles. However, this proposal was dropped when unit title reforms were implemented, allowing only the conversion of cross leases to unit titles which does not suit most forms of cross leases.

Property lawyers and their cross lease-owning clients are well aware of the deficiencies that still need to be addressed, with a simple statutory fee simple conversion solution required for smaller simpler cross lease developments.

Background

Cross leases were a popular form of “subdivision” created by lawyers in the late 1960’s to get around subdivision rules. In earlier cross leases there was often no distinction made between common areas and exclusive covenant areas.

Drainage was generally combined and kerb discharge for storm water was common practice. This cost-effective form of service provision ensured the continued popularity of cross lease developments amongst property developers for some time. Co-owners would co-own the underlying fee simple and take a lease, often for 999 years, in a flat, and often also have a restrictive covenant area for private use.

With the introduction of the Resource Management Act 1991 and resultant district plans, Councils started to impose more rigorous controls on cross lease developments. In some instances reserve contributions were being charged. Drainage rules were brought in line with those required for fee simple subdivision by mid- 1990. This brought virtually all cross lease development to an end.

Problems with cross leases

The key problem with cross leases is that cross lease owners and often real estate agents who sell cross lease properties do not usually fully understand them, or follow the terms of their leases. This in turn leads to alterations being carried out without neighbour consent and failing to be incorporated in flats plans, as well as breaches of other terms. These are often issues when properties are sold, and although the standard form ADLS/REINZ sale and purchase agreement prevents requisition if alterations are made in exclusive use areas as this issue is so prevalent, it does not solve the underlying problem.

These issues are often compounded in the current market when properties are sold at auction at short notice and purchasers do not have time to fully investigate title matters. Often “innocent” and/or unaware owners are caught out and are faced with trying to obtain a neighbour’s consent retrospectively.

Sometimes sums of money are “extorted” in order to get the neighbour’s sign off, and an owner may also have to go through the expense of depositing a new flats plan.

The other issue which often arises is when consent is sought both from a neighbour and for plans, the proper process is followed, and then the neighbour unreasonably withholds their consent. The only alternative in dealing with this issue is to proceed to arbitration as the sole dispute resolution mechanism, which is costly and through which there is no provision for costs to be awarded for unreasonable behaviour. Unit Title owners can at least now access dispute resolution through the Tenancy Tribunal but this option is not available to cross lease owners.

Cross leases are a ticking time bomb, as when cross lease flat buildings come to the end of their natural life, cross leases do not specifically address rebuilding issues. Many cross leases were created with buildings of different ages which creates further issues if not all flats need to be rebuilt.

Sometimes owners, when facing the costs of depositing a new flats plan, have sought instead to convert to fee simple, as they were facing significant survey costs anyway. This is fine when it is a more modern cross lease with separated services down the common area driveway and when reserve contributions have already been charged, but the cost is prohibitive when there are reserve contributions levied for older cross leases, and when some Councils want to impose modern driveway widths, service requirements and require buildings to be upgraded when converting existing cross lease schemes.

Law reform proposed in 1999

In 1999 the Law Commission proposed reform of cross lease titles along with unit title reform, and a bill was drafted allowing conversion. Unfortunately when the Unit Titles Act reform proceeded in 2010, the issues with cross lease titles were not fully addressed. The Unit Titles Act 2010 provides a process for conversion to unit titles which is suitable for multiple cross lease sites with shared walls and a more complicated infrastructure, but is not as appropriate for separate flats where there is no need for an ongoing relationship between the property owners. It also does not address the situation where there have been alterations made to flats not incorporated on the flats plan.

Government should legislate a simple, low cost process for conversion to fee simple whereby Councils are not allowed to thwart the process by requiring updated buildings, services or levy reserve contributions. This has already been drafted by the Law Commission.

There were no objections to the proposal for a voluntary phase-out of cross lease titles, but there were some objections to the mandatory phasing out of cross lease titles. We would suggest that the Bill be introduced allowing immediate voluntary adoption but providing a 10-year period before conversion became mandatory.

Conclusion

Setting up a statutory process for the conversion of cross lease titles to fee simple will not only deal with the problems that have arisen from owners not understanding their leases, breaching their terms with unauthorised alterations among other things, but will also be a step taken in time before old housing stock goes past the point of uneconomic repair.

It is nearly 45 years since cross leasing first started, and it is only a matter of time before aging housing stock creates additional problems. The necessary Bill has been drafted by the Law Commission in 1999 (Shared Ownership of Land Law Commission Report 59 1999) – we just need to see political will to see it enacted. The ADLS Property Law Committee is seeking to gather support for legislative action in this area – please email timothy.orr@adls.org.nz to confirm your support for legislation and/or let us know your cross lease horror stories.

Joanna Pidgeon is a partner at Pidgeon Law, an ADLS Councillor, Chair of ADLS’s Property Disputes Committee and a member of the ADLS’s Property Law Committee 

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