Buyers need to be aware of the complications of owning a cross-leased property. PHOTO / GETTY (posed by models)
Cross-leased properties are common in New Zealand. There are more than 100,000 of them in Auckland alone.
Many Kiwis don't think twice about buying cross-leased properties and the majority live happily ever after alongside their neighbours.
Cross leases were invented decades ago to make it easier to subdivide properties. Instead of jumping through hoops for council, owners were able to build multiple properties on the same site with relative ease.
Instead of buying their small parcel of land outright, owners of cross-leased properties own an undivided share of the entire parcel of land and they lease their own share from the other owners.
This type of "subdivision" has fish-hooks associated with it. If owners want to make changes to their property that could affect the flat plan on the certificate of title they need written permission from their fellow lessees -- i.e. the neighbours. Those "changes" could be something as simple as adding a deck.
Even a fence can prove problematic for cross-lease owners, says Daniel Coulson, national residential manager at Bayleys. A fence doesn't stop the other owners of the cross-lease property entering your property. That's not good if you and your fellow owners are candidates for Neighbours At War-type TV programmes.
Coulson says when buying cross-leased properties, owners need to make sure the flat plan is a reflective footprint of all of the buildings on the property.
"If a neighbour on your title does renovations which change the bird's eye view of their own dwelling and then fail to update the plan, all owners on the cross-lease title will now have a defective title."
Getting neighbours' agreement to work or fixing problems with the title isn't always easy. QV national spokesperson Andrea Rush says although the cross-lease neighbour needs to sign off, the law requires that their "consent shall not be unreasonably withheld".
If the neighbour digs their heels in this can result in the court having to decide for the two land owners.
"There are cases where owners may have to pay up to $30,000 for surveying and legal fees in situations where a neighbour doesn't agree," says Rush. There is no provision for costs to be awarded for unreasonable behaviour.
Sometimes it's only when owners go to sell that they discover there is a problem. Coulson has seen cases in which a vendor has purchased a property without realising the footprint didn't match the plan.
"Either we, or a prospective purchaser's lawyer uncovers the discrepancy in the title. This means that the vendor either needs to notify all potential purchasers of the defective title, or provide warranty that it will be rectified prior to settlement."
This, of course, leaves vendors footing the bill to have the issues resolved, or taking a hit on the purchase price. If not, the buyer can cancel the sale and purchase agreement.
"Valuers suggest buyers check with their lawyer regarding this, ahead of purchasing cross-lease property," says Rush.
Property investors sometimes face an added level of complication with cross-leased properties. Ashley Church, chief executive of the Property Institute, lives in a cross-leased property and owns a separate one as an investment property on another site. He hopes to subdivide the investment property. It was only when a neighbour came to him seeking permission to build a carport that Church realised the full implications of the cross-leased title to his own rental property.
Mark Trafford, a project manager who runs Maintain to Profit, bought a cross-lease property expecting to make a profit from subdividing his share of the land. It turned out that the ex-pat Chinese owner of the other half of the cross lease either didn't understand the system or wasn't interested. He failed to even reply to Trafford's requests. In the end, all Trafford could do was sell, and put the saga down to experience.
Church says it is possible to convert cross-lease titles to fee simple, where each owner owns their piece of land. However, it's not straightforward -- nor is it cheap.
The council may require certain services to be separated or upgraded to current standards and the driveway may need to be upgraded. A surveyor will almost certainly need to be employed as well as a lawyer.
There are some positives to cross lease. Rush points out that buyers usually expect to pay slightly less for land that is on a cross-lease section in normal market conditions to what they would pay for the same-sized freehold section.
At the moment, however, in the current hot market in Auckland, there is evidence that cross-lease status has had minimal impact, says Rush. When the market returns to normal, cross leases should come with a more reasonable price tag.