Our Team

Alexander Hayward Ltd
Level 1, 20 Market Street
Blenheim, New Zealand.

Phone: 03-578-9776
Fax: 03-578-2806
valuations@alexhayward.co.nz

Freehold or Cross Lease?

“Cross Lease” Vs “Fee Simple” and how does this affect value?

How do “cross lease” titles differ from “fee simple” titles?

Simply; all underlying land ownership in New Zealand is vested in Crown or is Maori land. Land titles i.e “cross lease” or “fee simple” are defined by tenure and provide a “bundle of rights” to the registered proprietor (owner) of the title. The higher the “level” of title ownership the greater number of rights the owner has in their bundle.

A “fee simple” title provides the highest form of land ownership in New Zealand and has an uncertain duration of tenure. As opposed to a, less than fee simple, i.e cross lease title, which exists for a defined period of time. The owner of a fee simple title enjoys the full rights of permanent and undefined tenure of their interest in the land (i.e freehold). Whereas the owner of a “cross lease” title is limited to a defined tenure, in most cases 999 years.

So why Cross Lease?

Cross lease titles were developed around the 1970s as an easy and most cost effective alternative to subdivisions. However today cross lease subdivisions are rare due to the implementation of the Resource Management Act in 1991, which for all effective purposes classified cross lease developments as a form of subdivision and imposed relatively the same cost structure.

What does Cross Lease mean?

To the naked eye and from the road side cross lease titles can easily be mistaken for freehold. The key difference lies in the “bundle of rights.” Keeping it simple, a small cross lease development might accommodate two separate flats constructed on one piece of land. Each flat owner typically owns a one equal undefined half share in the underlying fee simple title. By way of lease agreement the flat owner then “leases” from the other flat owner and themself (both flat owners as equal owners in the underlying fee simple title) the exclusive rights to occupy their flat and associated grounds for a set amount of time (usually 999 years.) Each flat will have its own composite title which has the effect of combining their half share in the fee simple estate and the 999 year leasehold estate established by the lease agreement.

Cross Lease Restrictions/Covenants

Cross Lease titles further typically contain a number of covenants which each flat owner is bound to comply with under the terms of their lease. These covenants are many and varied but I will highlight a couple.

Flat Plans – Each owner’s exact flat dimensions and exclusive use areas are defined and recorded on “flat plans” which usually accompany the composite title. Technically, this means that if you decide to construct an addition to your flat without consent from the other flat owner and updating your flat plan then you do not have exclusive use rights over the addition. Worst case scenario, finding the adjoining flat owner relaxing under your new verandah or sun bathing by your new pool. Further, each flat owner must keep the interior and exterior of their flats in a good state of repair, with inspection by the other flat owner permitted to ensure that all covenants are being complied with. Long story short, getting it wrong can be costly and time consuming when it comes to sell.

How does this effect value?

If an estate in “fee simple” provides the highest form of landownership in New Zealand, giving you the most rights possible, and a “cross lease” provides you with a reduction in the number of rights then how will this affect your property value?

A right is a “benefit” of ownership. To illustrate let’s use an example. You walk into a car dealership and can’t believe your luck, they have the car of your dreams in the yard and wouldn’t you believe it, they have two! From the outside, both the same; age, colour, km’s on the clock, everything! (Much the same and a cross lease or fee simple property to the passer by on the road side.) You enquire to the salesman and he informs you that they are basically the same and will get you from “A” to “B” the same. Except, one has been driven by the companies executive and has, built in seat warmers, ultra-fast heater to warm you up faster on those cold winter mornings, top of the line audio equipment, high performance tires, cruise control, electric adjustable seating, leather inferior, cup holders, racing suspension and a whole raft of other benefits which start to really appeal to you. Although they look the same on the outside the question arises would you pay a little more for the extra “benefit” of the additional features???

This may have diverged off topic but I hope you get my point. More benefits i.e. “rights” in the “bundle of rights” is more highly sought after and in turn worth more, theoretically!

Practically, the market place does not always fully differentiate between “cross lease” and “fee simple” titles. Many buyers and seller don’t understand or care to understand the difference between different forms of land ownership. A fundamental of any market transaction is that there is a “willing buyer” and “willing seller.” If willing buyer is defined as a; “prudent, willing, not over anxious and fully informed buyer of real property”, then theoretically a “fully willing” and “fully informed” buyer would place more value on the extra “benefits” associated with the additional rights accompanying the “estate in fee simple” (freehold) title. That holding true, much like the high spec car, if you have the same house, on the same sized piece of land, right beside each other in the same neighbourhood and in the same condition but with one on a “fee simple” title and one on “cross lease” title then the educated “willing buyer” will pay more, in an open market, for the house on the fee simple title.

Seek the right advice.

My point when writing this article was not to scare, alarm or suggest which form of ownership is right, simply inform. The most responsible thing any purchaser can do when looking to invest in property is ensure they have all the correct information. They will then be in the best possible position to make an informed decision. “Cross Lease”, “Fee Simple” or any forms of title, ensure that you seek the right advice, from the right people.

Blair

Comments are closed.