Litigation, Disputes and Employment
CROSS LEASE UPDATE
Cross lease owners better positioned to secure consent for property development works from their cross lease neighbours, following recent High Court decision
Cross lease titles are a common form of property ownership in New Zealand, accounting for over 100,000 property titles in Auckland alone. It is a feature of cross lease ownership that an owner must obtain the consent of all neighbouring cross lease owners before undertaking structural alterations to their dwelling. However, GHJHthis is subject to the proviso that a neighbouring owner’s consent must not be unreasonably or arbitrarily withheld.
A recurrent issue faced by owners of cross lease properties is that despite their property being zoned in an area allowing for higher density development (pursuant to relevant planning rules), they are prevented from undertaking development works, and sometimes necessary repairs, due to a failure to obtain the consent of their fellow cross lease owners.
The leading authority on cross lease consent disputes has long been Smallfield v Brown (1992) 2 NZ ConvC 191, 110 (HC). In the recent case of Martelli v Liow [2024] NZHC 968, the High Court was asked to clarify whether Smallfield v Brown created a legal test for determining whether a cross lessor has unreasonably withheld their consent. The Court concluded that it did not. It instead considered the correct approach to disputes over consent is to consider what a reasonable landlord would do when asked to consent in the particular circumstances of the case. This is a positive development for those cross lease owners wanting to develop their exclusive areas.
Smallfield v Brown (1992) 2 NZ ConvC 191, 110 (HC)
In this case, the Browns added French doors and a deck to their flat without securing the consent of their cross lease neighbours, the Smallfields. While the Browns had originally sought the Smallfields’ consent, when this was not given, they proceeded with the alterations anyway. This prompted the Smallfields to apply to the High Court for an injunction on the basis that the Browns had breached the cross lease agreement. The High Court concluded that it was not unreasonable for the Smallfields to have withheld consent, on the basis that the alterations constituted a sufficient detriment to the Smallfields to outweigh the corresponding benefits to the Browns (being interference with the Smallfield’s privacy, noise levels and visual intrusion). The injunction was granted.
In its reasoning, the High Court commented that “consent will be unreasonably withheld where the benefit to the party seeking change will be substantial and the proposed alternation would produce only trifling detriment to the neighbour”.
This comment has since been routinely applied as the test in cross lease disputes regarding consent. The key problem with this approach is that it is very much weighted in favour of the opposing lessor. The opposing lessor need only prove the detriment they will suffer from their neighbour’s proposed works will be more than trifling or trivial, and they may prevent the works proceeding. This problem had been identified in academic commentary; however, due to a lack of judicial clarification (as cross lease agreements typically contain a clause whereby disputes must be referred to arbitration in the first instance), the High Court’s comment in Smallfield v Brown continued to be cited as the legal test for determining questions of consent.
Martelli v Liow [2024] NZHC 968
This was an appeal against an arbitrator’s determination that the claimant’s neighbours were not unreasonably withholding their consent to a proposed new swimming pool and deck. The arbitrator had found there were very substantial benefits to the claimants in going ahead with their plans, yet considered he could not find in their favour. He commented “if the law placed the fulcrum of assessment in the middle between the two competing sets of interest and concerns, I would have no hesitation in finding in [the claimant’s] favour. But that is not the test.” He considered himself bound to prioritise the perspective of a cross lease owner objecting to alternations, pursuant to the ‘substantial benefit’ and ‘only trifling detriment’ test in Smallfield v Brown, and was not persuaded that the respondents’ concerns could be dismissed as being mere trifles.
On appeal, the High Court was asked whether the ‘substantial benefit’ and ‘only trifling detriment’ test from Smallfield v Brown is in fact the legal test for when consent will be unreasonably withheld.
The High Court considered that treating that comment from Smallfield v Brown as a test would “add a gloss to the quintessentially fact specific assessment of unreasonableness required” under the terms of a cross lease agreement. The High Court clarified that it is not inappropriate to assess unreasonableness by reference to relative benefits and detriments of the proposal to the respective cross lessors. However, that factual assessment should not be constrained by a legal test that quantifies the extent of benefit and detriment in the abstract.
The High Court held that the correct approach when considering whether the basis for withholding consent was reasonable is to consider what a reasonable landlord would do when asked to consent in the particular circumstances, and whether that conclusion was one that could be reached by a reasonable landlord. It was of the view that if a landlord reasonably believes that a proposed land use would injure its interests, then the landlord may refuse its consent.
Implications
The High Court’s approach appears to make it easier for cross lease owners seeking to develop their properties to obtain the consent of their cross lease neighbours, or if consent is refused, obtain a favourable arbitration ruling. While the High Court has not provided definitive criteria for what might be reasonable, it has removed the ‘only trifling detriment’ gloss from the reasonableness assessment and clarified that the correct approach is to undertake a fact-specific assessment of what is reasonable in the particular circumstances. This provides greater scope for appreciation of the interests of both parties.
In addition, the High Court has clarified that if a lessor is refusing to consent, this must be based on a reasonable belief that the proposed development would injure their interests. There is no exhaustive list of reasons why a lessor might believe their interests would be injured. For instance, it could be the effect on privacy, view, property value, or ability develop their own dwelling. They key consideration is that the lessor’s conclusion needs to be one which could be reached by a reasonable landlord, in light of the particular factual context. In some situations, expert evidence may be required to assess the reasonableness of a particular conclusion, for example, where there is a belief that there would be negative impacts to property value. This case makes it clear that arbitrary reasons for withholding consent (such as having a personal dislike of your neighbour) will not be reasonable.
We note that the parties in Martelli v Liow have applied to the Court of Appeal for leave to appeal or cross-appeal the High Court’s decision. For the time being, the High Court decision is the current law for determining the question of whether consent is unreasonably withheld in cross lease disputes.
