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Cross-Lease Opportunity

Investors should consider whether a cross-lease property could be converted into a fee simple, before dismissing this investment type, writes Mason Reed.

By: Mason Reed

1 October 2020

I have written previously on the pitfalls of owning a cross-lease property. However, I think in these uncertain times there is a real opportunity to “value-add” if you currently own, or are looking at purchasing a cross-lease property, because there is a mechanism available to convert existing cross-lease tenure to fee simple.

Due to the complex and prohibitive nature of cross-lease properties, typically a cross-lease property will be in less demand than a fee simple property, which subsequently affects the value of the asset.

The reason cross-lease properties are less desirable is that there are specific provisions set out in the cross-lease documents which restrict what you can legally do to your house. In many cases, making changes to your property without neighbours’ written consent, is in breach of the conditions of the cross-lease.

The reason for this is that a crosslease is a form of tenure where multiple individuals own an undivided share in the land upon which the structures are sited. The land is being leased from all the other owners, generally on 999-year terms. Cross-leases started in the 1970s as a way of obtaining a separate title, often avoiding the subdivision rules and associated financial contributions, thus providing a significantly cheaper way of subdividing.

There are important considerations when owning a cross-lease. The joint ownership requires additional checks to be undertaken prior to purchase and can complicate the sales process. Things to be aware of:

• You are required to get written permission from all the other title owners if you want to carry out any additions or alterations to the exterior shape of the building.
• When buying the property, the relevant flats plan must truly reflect the location and configuration of all of the buildings on the property. If not, it is referred to as a “defective title” and may result in purchasers not getting a mortgage approved until the title is corrected.
• When selling a property, a “defective title” may delay the selling process again until the situation is rectified by a new flats plan.
• In either case a new flats plan will need to prepared by a Licensed Cadastral Surveyor and deposited with LINZ.
• “Common property” is a part of the site where all lease holders have use of the area. This can lead to conflicts regarding use and maintenance, particularly when the “common property” is a driveway.
• Depending upon the terms of the cross-lease, there may be need to obtain all owners’ approval for painting the exterior or making non-structural changes to a building, constructing a deck or erecting a fence.
• Cross-lease owners must have a current insurance policy, but these do not have to be with the same company. This can raise significant problems in cases of fire or earthquake damage. However, a cross-lease can be converted to a fee simple title. This is typically called a “change of tenure” subdivision.

It will involve a full subdivision consent application which council will normally approve subject to some conditions. It should be noted that most councils are in favour of the “change of tenure” and have simplified their rules regarding this type of subdivision.

Typical conditions include the requirement to provide individual water connections and suitable easements covering any services. In some cases, a council may not require payment of any development contributions.

Following satisfaction of all consent conditions, a full Land Transfer Survey, including pegging of all boundaries, needs to be undertaken and approved by LINZ. All areas shown on the cross-lease must be accounted for and all owners are required to sign the final documents.

You will require the services of a Licenced Cadastral Surveyor to undertake the necessary survey works and to prepare the subdivision consent application and also a lawyer, to deal with the legal matters associated with a change of title.

It is our opinion that it is well worth considering addressing your “cross-lease headache”, as the advantages of fee simple over cross-lease tenures are numerous:
• Fee simple titles are easier to sell with typically higher sale value.
• The land owner has greater flexibility on what they can do with their property, especially in terms of additions and alterations.
• Potential buyers have less issues obtaining a bank loan.
• The risk of any neighbour disputes regarding use of the property is mitigated.

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