New Zealand: Web of insurance issues in cross lease properties

Owners of cross lease properties face much the same complexities as owners of unit title properties in that your insurance claim affects your neighbours as well as you. The difference is that, unlike unit title properties (where all unit owners are covered by the same insurance policy taken out by the body corporate), cross lease properties often feature adjoining properties covered by different insurance policies.

Cross lease properties usually feature two or more flats built on one parcel of land, with long term (999 years is common) leases giving each flat owner the exclusive use of their flat. As an owner of a cross lease property, you are bound by the terms and conditions in the lease document registered against your title. The lease forms used for cross leases are reasonably standard, but several different forms exist. What applies to one cross lease development may not apply to another.

So, when it comes to insurance issues with a cross lease property, it all comes back to what the cross lease says. If you are a cross lease property owner – when was the last time you read your lease document? Have you ever read it? Do you know what your lease says in the event your property is damaged or destroyed by an earthquake?

Lease terms

Some cross lease property owners are negotiating their earthquake claims with the EQC and their private insurer, with little, or no regard to the terms of their lease. This is dangerous.

It is common for the lease to require the owner of each flat to individually insure their property. The lease usually states that if a flat is destroyed by any cause, including earthquake, then the flat owner will repair and make good that destruction or damage at their cost. But the difference between a cross lease property and a normal freehold property (where the owner also insures their own property) is that a cross lease owner has obligations to the other owners of all flats in the cross lease development. This means that you do not have total control over the process. Technically, the insurance must be in the name of the owners of all flats in the cross lease development. Any repair and reinstatement work on an individual flat must also be completed to the satisfaction of all flat owners.

So, if you do not have adequate insurance in place and there is a shortfall in the costs to repair or reinstate your flat, then you will need to fund the shortfall in cost yourself. The other flat owners can also require you to complete the reinstatement or repairs to their standards. In some cases, the other flat owners have the right to complete repair and reinstatement work and charge you for your share (based on your land share) of the cost.

In some cases, the lease provides for all of the flat owners to communally insure all flats (similar to the unit title approach). In that case, all flat owners must be involved in any decisions about repair or reinstatement of any of the flats.

You need to check the lease document to know which approach is specified for your cross lease development. Either way, co-operation with the other flat owners is likely to be necessary in the settlement of insurance and EQC claims. This makes sense where flats are adjoined and earthquake damage is likely to affect multiple flats in a similar manner.

Different insurers and delays

However, when every flat owner has their own insurance policy, which potentially means each flat is covered by a different insurance company, things get complicated.

Cross lease properties are facing lengthily delays to have their repair work signed off by the EQC and their private insurer, especially where the flats are joined by party walls and each owner insures their flat with different private insurance companies. The delays are commonly because of the interaction required between insurance companies and the differing scope of works and repair strategies for repairing damage, and the timeframes for completion. For example, one insurance company may commit to replacing one flat, but the insurer of the adjoining flat may deem that flat a repair. This may lead the owner to objecting and negotiating with their insurer, which then effectively puts the first flat's rebuild on hold until the second flat's insurance issues are resolved.

Another such issue is when one flat owner completes an insurance settlement with their insurer and their flat is subsequently demolished and that neighbour has no intention of rebuilding. How long will you be looking at an empty section? Do you enforce you rights against your neighbour? Do you take the opportunity?

As well as issues with the actual flats, another issue is remedial work to common areas, such as the common driveway. If owners are separately insured with different insurance companies, each owner's insurer calculates the cost of repair and that flat's share of it. It is then for all owners to obtain their insurance entitlement and coordinate a repair. Further issues arise if different insurance companies differ on the repair cost and share of each flat. The differences could result in a shortfall of funds available to complete the required repair. What will you do if one owner decides that the work doesn't really need to be completed and does not engage or contribute to the work even though they have received the money to do so?

The terms of the lease have far reaching consequences. There are many cross lease property owners who have completed negotiated settlements with EQC and their insurance company and will not be completing their obligations under their lease. These owners are in breach of their lease and could be exposed to legal action by other flat owners under the lease. If this is a situation you are in, or are potentially heading into it, then you need to seek advice.

Neighbours' consent and footprint

In repairing or rebuilding your cross lease flat, be aware that there are some things you cannot do without the prior written consent of the other land owners. The most common is to not alter, add or extend and existing building on the land or to alter the external dimensions of the flat.

If you are looking to comply with your lease obligations and complete any required repair or rebuild work, then remember your lease is only for the footprint of your defined flat area. If you are looking to rebuild and are taking the opportunity to redesign your house, then you may be heading for a host of legal problems. For example, if the rebuild results in your new house straying outside the original defined area on the flat plan attached to your title, you will be in breach of your lease and will not have legal title to the part of the house which is outside the footprint of the original house. Good luck trying to sell the rebuilt house.

There are ways to allow you to extend or redesign your rebuilt house, but you will need the other land owners (and their banks) to consent to this and it will involve a surveyor completing a new survey of the house and then the issue of new leases and titles for all flats that form part of the cross lease development. This is expensive and time consuming. If you are facing this situation, seek legal advice.

Many people who are completing repairs to their flat are taking the opportunity to do some other improvements. If this additional work involves structural alterations, your lease commonly has a provision regulating this as well. Most lease documents state that if you are undertaking or making any structural alterations, then you need the prior written approval of all the lessors, such consent not to be unreasonably withheld. Again, if you are facing this situation you should seek legal advice about the approval process and assist you if a lessor chooses to withhold consent.

If you are a cross lease property owner or looking to be one, become familiar with the terms of your lease before you settle your EQC or insurance claim and make sure you understand your obligations to the other flat owners. Take advice if you are unsure.

Panel

  • Cross lease properties are unlike unit title properties in that each flat owner usually has to arrange their own insurance.
  • Each flat owner does not have complete control over their insurance claim as all flat owners have the right to require that each flat is repaired or rebuilt to their satisfaction, even if there is a shortfall in insurance cover and the flat owner does not want to fix the damage.
  • Care needs to be taken when you are settling a cross lease insurance or EQC claim that any rights the other flat owners have are observed. Flat owners who cash settle their insurance claim and then do not repair or rebuild may have issues with their neighbours.
  • Delays can occur even if your insurer has approved your claim if other flats' insurance claims have not been approved or settled.
  • Problems emerge when different insurers are involved and make different assessments as to common damage e.g. driveways.
  • Note that repairs or rebuilds which change the external footprint or envelope of a cross-lease property can create legal problems, usually requiring the consent and re-issue of leases and titles for all flat owners
  • Structural alterations also need the consent of all flat owners

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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