So you own a cross-lease property in Kohimarama, Glendowie, Orakei, St Heliers, Mission Bay & Remuera (or any other Auckland suburb really) and are thinking about selling? Or thinking of buying a cross-lease property in the Eastern Bays or Remuera suburbs but unsure about what you should be looking out for, and how to deal with the issues?
Cross-lease properties can be tricky for the uninitiated. You have better things to do all day than to read dense legal documents. But there can be a huge minefield if you are not careful. Or if you don’t have a agent with a legal background who can understand the implications and guide you safely through the maze.
Let’s face the truth now.
Potential buyers will be reading news about how cross-lease properties are ‘ticking time bombs’. They will scrutinise your cross-lease property, especially in this market where there can be ample supply, and no FOMO (‘fear of missing out’).
Banks (as a result of credit rationing policies) will be really quick to say ‘NO’ if there is any hint of issues with the security (i.e. your cross-lease property). And cross-lease properties can often throw up ‘deal-breakers’. This means that you will be unable to buy that dream home. Or sell that home to someone who’s really keen to buy it because of a lack of lending. How many buyers have a couple of million dollars lying around to buy that expensive cross-lease house on Riddell Road?
Many agents, especially those without a legal background, are not going to be familiar with the technicalities or ‘fine detail’ of cross-leases. They prefer to leave it to the lawyers.
In my opinion, this can be disastrous and expensive – lawyers are extremely familiar with the legalese, but may not be in tune with market/commercial realities and marketing nuances in the real estate market. Whilst legal advice is invaluable, having a well-informed preliminary opinion from a real estate agent familiar with cross-leases on what needs to be fixed or done (if at all) can often guide all parties in legally achieving the best possible outcome given monetary and practical constraints.
At the very least, you will know what questions to ask your lawyer, especially if he/she has not viewed your property in person.
Hopefully, by the end of this article, you will know more about cross-leases and the possible problems. You will also have a good idea about what you need to do in order to present your cross-lease property in the best possible light (by making it easy for purchasers to seek financing from banks).
Basics first - what's a cross-lease?
A cross-lease is where multiple people (including you) own an undivided share of the land, which they build on, with your specific piece of land being leased from the other owners (generally for a period of 999 years).
By way of background: cross-leases were originally designed to circumvent the subdivision fees set in the 1970s. However, when the Resource Management Act 1991 came into effect, the advantages of a cross-lease development was removed.
The main difference from a fee simple (freehold) title (where you are not the sole owner of your land or your home) is that you own the property jointly with others. And you own a leasehold interest in the particular area and building that you occupy.
There is usually a memorandum of lease which determines the rights and obligations of all the co-owners and relate to issues such as insurance, alterations and additions, dispute resolution and maintenance. There are general leasing principles to adhere to, such as ensuring that you don’t create a nuisance and allowing the other cross lease holders to quietly enjoy their tenancy.
Depending on the terms of the cross lease, you may need to get the other owners’ consent for things like painting the exterior or making structural changes to the building you occupy, building a deck or putting up a fence. There may be restrictions on what you can do with the property under the terms of the lease registered on your title.
How Do I Know If Mine's A Cross-Lease Property?
Easy as. Do this for free.
- Click on Find your property rates or valuation
- Enter your address. Click on your address.
- A new page will appear with three tabs – “Property Valuations”, “Property Rates” and “Property Information”.
- Click on the tab labelled “Property Information”.
- If you see the heading “Legal description” and your property is on a cross lease then it will be described as Flat Y on Lot Z DP XXXXXX.
Scrutinising the Flats Plan In A Cross-Lease
Given that you only own a leasehold interest in a particular area/building, the very first thing you should do before selling a cross-lease property is to obtain a copy of the title and the flats plan. This isn’t difficult – anyone can order one cheaply here (and I am happy to assist).
A cross lease title will include a plan showing the footprint of the building you are entitled to occupy, called the flats plan (see below image). This is often the greatest source of frustration and roadblocks to a successful transaction.
It’s crucial to discover any issues BEFORE putting your house on the market and commencing marketing.
This gives you time to rectify any problems or objections that may arise from buyers. If buyers find out in the middle of a marketing campaign (or worse, after having signed a conditional sales and purchase agreement), you can bet that they will disappear like flies. Or extract a significant discount from you. Is that really what you want?
The flats plan will show the layout of the cross leased flat and it is important to compare that with what is actually built on site. You should check that the flats plan (also known as the ‘footprint’) correspond to the location and size of the house.
It is very common for cross leased properties to have had various additions and alterations that will not be reflected on the flats plan, often due to owner’s lack of understanding of the type of title they own. This then leads to what is known as a defective flats plan / title.
Why is it critically important to you (as the vendor) that the title is not defective?
Now you may wonder: what’s the big deal about the ‘footprint’ of the actual building not matching the flats plan or the title being defective? Isn’t it just a mere technicality? What if I really like the additional garage?
Well, for all intents and purposes, most buyers will be fine with the improvement/alteration. Most would be happy keeping the additional carport or extension to the deck to view that perfect sunset over Rangitoto.
But the objections typically do not come from buyers directly. The reality is that the problem often comes from lenders who are advised (rightly, I might add) by lawyers that the title is defective. This has a negative impact on the value of their security (future resale) and naturally raises the banks’ alarm.
Some buyers (also understandably) do not want to take the risk that their other cross-lease owners will object to such alterations and force them to remove them. Who wants the hassle for nothing?
The ADLS standard sales and purchase agreement
Now, when it comes to the selling or buying of residential property in Kohimarama, Glendowie, Orakei, St Heliers, Mission Bay or Remuera, almost everyone uses the ADLS standard sales and purchase agreement.
Under that agreement (unless you are selling/buying via auction), it is provided that the following can be requisitioned (in clause 6.3):
- alterations to the external dimensions of any leased structure (such alternations limited to alternations that are both ATTACHED to the leased structure and ENCLOSED); or
- buildings or structure not intended for common use which are situated on common area
What’s A Title Requisition?
A title ‘requisition’ means the purchaser can object to the title within 10 working days from the date of the signing of the agreement.
This is above and separate from any other conditions that the purchaser may require (for e.g. building or LIM), and is unlikely to be removed from the standard sales and purchase agreement. In other words, this title requisition clause is already built into the standard sales and purchase agreement. The removal/striking out of such a clause will immediately raise alarm bells.
So why this can quickly become a serious problem?
As the vendor and if the title is defective, you have 3 options upon receiving the requisition notice.
- You can warrant to correct the title (by updating the flats plan) before settlement (see possible costs and timeframe below).
- You can choose to not correct the title and the purchaser is then entitled to cancel the contract
- You can negotiate with the purchaser for them to fix the title in return for a reduction in price (if timely settlement is important to you)
In the past, banks might have turned a blind eye to it, especially if the defect is minor. However, in recent years, banks have taken a very cautious approach to defective cross-lease title issues and have frequently refused lending (even when purchasers promise to fix it after settlement) as they see their security at risk.
This would mean that Option 3 can be excluded, even if the purchaser is happy to deal with the problem.
Remember: A defective title will definitely reduce the pool of buyers and affect your sale price.
The reasons are as follows:
- some might not be able to obtain finance to purchase the property
- some might not be willing to take the risk and substantial hassle of fixing the title themselves – this can be difficult when there are multiple leaseholders (for e.g. the cross-lease property is one of 6 others!)
- they would almost always use the defective title as a bargaining tool to push you down on price – the reduction in price often more than it usually cost to fix the title as they are factoring in their time and effort involved. This is where you suddenly face the prospect of losing tens of thousands.
And you can’t just pick Option 2 (i.e. choose not to correct the defective title and walk away from this purchaser) and sell it to another purchaser. Notwithstanding the risk that there may be no other interested buyer, your real estate agent will now have to disclose the defective title (even if the other buyer did not inquire as to the reason for cancellation of the previous contract) to all other potential purchasers. Few agents will risk breaching their legal obligations of disclosure for such key issues – especially when there is likely to be a long paper trail.
Can you see how your buyer pool suddenly shrinks even further and the impact on your final sale price? Sure, you might get lucky and get a cash buyer who doesn’t care. But what are the odds?
So when is a cross-lease title defective and how can you remedy it?
The following situations describe common issues with cross-lease titles and the usual remedial solutions.
This problem is the ‘easiest’ to resolve. You can typically remedy the defective title by simply asking all other co-owners for written consent for the works done (see clause 9.6 of the standard sales and purchase agreement).
In the following circumstances as listed below, you should heave a huge sigh of relief as these issues will not result in a title requisition! If you can, do this before going on the market.
- If the improvement is NOT ATTACHED to the building and is on the EXCLUSIVE USE AREA for that building. For example, a standalone garage, or a studio/garden shed.
- If the improvement is ATTACHED to the building and is on the EXCLUSIVE USE AREA for that building but is NOT ENCLOSED. For example, a carport, deck, balcony or pergolas.
This situation becomes tricky. The only way to rectify the defective title is to update the flats plan and issue a new title. In such circumstances, you need to have a discussion with your real estate agent and solicitor as to the next steps.
And again, this is why such problems are best resolved before going on the market. Your real estate agent should have a plan to deal with these issues (if they even know or can spot its existence – you will be surprised how many do not understand the complexities of cross-leases) – don’t just ‘list and pray’ that no one finds out.
- If the improvement is ATTACHED to the building and is ENCLOSED. For example, an extension to the existing house, an internal access garage, or a conservatory.
- If the improvement is located on the common area but is designated for the exclusive use of one flat owner.
- If a structure has been REMOVED from the flats plan, but is still referred to as part of the legal description on the title. For example, if the legal description says “Flat 2 and Carport B on Deposited Plan XXX” and the carport was subsequently taken down.
If the title needs to be updated, the following (as a rough guide) will need to be undertaken (minimum cost of $10,000 + GST) and can take at least 2 months to complete:
- Surveyor needs to come and resurvey the land
- All co-lessors need to agree
- New legal titles for all cross-leased properties need to be issued
- All co-lessors’ mortgagees’ consent need to be obtained
- There may be other conditions Auckland Council might require you to fulfil
Given the above, if the title is truly defective and can only be remedied by updating the flats plan, you might consider doing that first before going on to the market or warrant in the contract that you, as the vendor, will update the flats plan and remedy the title before settlement.
This will give you a greater pool of buyers and likely net you a better sale price.
FREEHOLDING CROSS-LEASE TITLES
It is also possible to convert cross-lease titles to fee simple (freehold) titles. The cost can start from $17,000 +GST for each cross-lease owner.
Depending on whether your fellow co-lessors are willing to fork out that amount, converting to cross lease might often be a better option as it usually increases the value of your property. At the very least, it appeals to a greater pool of buyers when you come to sell. You don’t have to get into arguments as to whether the cross-lease title is defective or not. Do as you please with your house (subject to Council’s Consents and the Building Code of course).
Is it enough to have building consents / Code Compliance Certificate (CCC)?
Short answer, no. This is absolutely a red herring.
Auckland Council issues CCCs without any regard to whether this is allowed under the cross-lease as that is not under their purview. As such, it is entirely possible for a structure to be consented (like a garage) but still have a defective title because of the above reasons (for e.g. it is not reflected on the flats plan).
If I have a defective title, should I disclose it, and how should I do it?
Talk to your real estate agent and lawyer on how best to deal with this. Unfortunately, this is a legally nuanced question which is factually dependent. Hence it’s not possible to give a generic answer.
The general position is that more disclosure is better than none – which is why it’s all the more important to identify and fix these issues before they arise during a marketing campaign or during negotiations. If these issues are fixed, then there’s nothing to disclose.
Just remember – the less roadblocks and issues you create for your buyers, the more desirable your property is to the buyer, especially in the current market. Buyers are very picky and will not hesitate to look or wait for another less problematic property to buy.
And this is why you want need a real estate agent that’s intimately familiar with ‘legalese’ to identify, advise and deal with the issues. Gone are the days whereby any one can just stick a ‘for sale’ sign and the property will just sell on its own.
Does the method of sale for a cross-lease property matter?
Short answer – yes. Auctions allow for unconditional sales so there is no title requisition clause. You may start thinking – shouldn’t I go for auctions then if I’ve a defective title?
But remember this: your buyers will have to do their due diligence prior to auctions. This can put buyers off, especially in the current market. Nobody wants to spend money on legal due diligence without any certainty of winning the auction, especially if there are potential issues. There’s plenty of choices out there without such headaches.
Therefore if you are selling a cross-lease property today, you need to, at the very least, consider this (i.e. whether you have a defective title) when deciding between the various methods of sale. If your cross-lease title is fine, then an auction can give you a better chance of a positive outcome. Ready to set a record price for your street in Kohimarama, Glendowie, Orakei, St Heliers, Mission Bay & Remuera?
But this should not be the only deciding factor – the desirability of your property in other aspects (for e.g. location, price, buyer type etc) matters. Auction clearance rates matter. Your real estate agent should consider this point when choosing the appropriate method of sale.
A real life case study about a cross-lease Kohimarama property for sale
Jason and Sally have found their dream home in Kohimarama which was for sale by negotiation. Kohimarama school zone. Close to popular Madills Farm. Near to bus routes to Saint Kentigern School. Nicely done up. And surprisingly within their budget. They put in an offer and, after some negotiation, signed the sales and purchase agreement with only the ‘building inspection’ condition.
They then engaged a lawyer who reviewed the title plan. Upon inspecting the floor plan, the sharp eyed lawyer noticed that the 2nd level kids’ bedroom was slightly extended and therefore different from the flats plan. The purchasers did not spot it and the real estate agent listing the property certainly did not either! No one had any idea what was going on.
The lawyer representing Jason and Sally then issued a title requisition notice to the vendor’s lawyers. There was some back and forth discussion between the two sets of lawyers as to whether it was indeed a ‘defective title’. However, Jason and Sally’s solicitor had to notify the bank about this issue (as part of her legal duty owed to the bank) – and the bank responded promptly – denying finance. Well-laid plans were suddenly thrown in chaos.
Luckily for the vendors, Jason and Sally did not walk away when they very well could do so. There were lots of properties on the market. I worked closely with them through the risks, talked to the lawyers and obtained the fee estimates of rectifying the issues.
After some negotiation with the vendors and panicky calls to other banks, Jason and Sally finally obtained mortgage approval from another bank, with an attached condition to fix the title after settlement. The vendor (who was keen to move on) had to give a significant discount to compensate Jason and Sally for their hassle to fix the issue.
Moral of the story? Don’t be that vendor.
Make sure your cross-lease property is perfect legally. And make sure you pick a real estate agent who is meticulous and sharp enough to check it properly, and advise you on the possible legal issues!
Conclusion about cross-leases
If you have a cross-lease property and are thinking about selling, be aware of these issues and be pro-active about resolving them. Don’t attempt to bury them and hope they go away.
Don’t assume that your purchasers will face no issues buying your property because you faced none when buying. Times (and banks) are different.
And you should also absolutely speak to a real estate salesperson who thoroughly understands the cross-leases and defective flat plans and their legal implications, and can give indicative views as to whether the title is truly defective and think about possible solutions. Do this (for free) before you approach your lawyer and engage in a thoroughly expensive exercise.
In this market, what you really need is a salesperson who can balance the legal and commercial aspects, understand what’s going on and advise you as to the best strategy to market and sell your cross-lease property.
Buying a cross-lease property? Take this due diligence checklist with you!
CROSS LEASE DUE DILIGENCE CHECK LIST
Are the title plans for the entire development consistent in defining common area and exclusive use area? Does the plan match reality?
Check to see if any additions or alterations have been made to the leased flat. In particular, be careful around vertical alterations or additions such as enclosing carports, porches and decks, extensions to decks, old decks being built over or slightly increased dimensions or vertical alterations with the addition of another floor.
Read the terms of the lease. In particular, pay attention to clauses dealing with insurance, alterations, decision making and maintenance.
Check the actual practice of insurance and maintenance to see if this differs from the position stated in the lease.
Check to see if neighbouring properties have made any addition that may result in new or unauthorised additions or alterations, such as decks which may have resulted in them using existing site coverage to your detriment.
Found this post useful and have more questions?
Very few real estate agents have a legal background. Work with someone who understands the ‘fine print’ so that you don’t have to.
Do not hesitate to contact me for a no-obligation discussion over coffee on your future plans to either buy or sell.