Freehold, Cross-lease, Leasehold…….Understanding different property types in New Zealand

Disclaimer: The below guide is general in nature and do seek individual financial advice to see how this applies to your situation. Our experienced advisers are on hand to help at no cost to you (T’s and C’s apply)

It is crucial to understand the nuances of different property types to make an informed decision when buying.

In New Zealand, various forms of property ownership exist, each with their own set of rules and considerations. This article explores the most common property types in New Zealand, and potential things to watch out for with each one.

Tip: The type of property will always be stated in the sale & purchase agreement for that particular property, and you can always ask the estate agent.

Freehold

Freehold properties are the most straightforward and desirable form of ownership. When you own a freehold property, you own both the land and the building. This type of ownership provides the greatest degree of control, allowing you the most freedom to make decisions about your property with the least amount of interference from others.

However, it's still essential to be aware of any council zoning, encumbrances, covenants or restrictions on the title. Ask your solicitor to guide you through this.

Cross-Lease

Cross- Lease and Leasehold sound similar and can often be confused, but these are certainly very different property types!
Cross lease is generally considered to be almost as good as freehold, ….whereas leasehold is….not as good.

Cross-lease properties involve shared ownership of land with other property owners. Each owner holds a lease over the other's land, and there is typically a shared responsibility for common areas.
To give an example comparison, with freehold you may own, say 500 square metres of land. With a cross-lease, you might own half of 1000 square metres and your neighbour owns the other half of 1000 square metres. The area you own is still marked out - so don’t worry, your neighbour won’t be having a beer uninvited on your lawn or anything unless it’s an area marked “communal”.

Cross-lease titles can be more complex than freehold titles, and it's crucial to understand the terms of the cross-lease agreement. Some cross lease agreements have restrictions on what you can and can’t do. For example, further building work may need your neighbour’s approval. You will also need to understand the maintenance responsibilities and costs associated with shared areas (If any).

Your solicitor will be able to guide you through the technicalities of each individual cross-lease agreement.

Stratum in Freehold (Unit Titles)

These are commonly referred to as ‘unit titles’. Stratum in freehold arrangements are common in multi-unit developments like apartments or some townhouses. You own:
1) your part of the building (“stratum title”)
2) a shared ownership of shared areas, and
3) a shared ownership of the overall land.

With these types of properties, there are usually a lot of shared areas that require maintenance. For example, it wouldn’t be fair to only charge the top floor in an apartment building for the costs of maintaining a roof which the whole building benefits from, and therefore this responsibility is split between the owners of all the different units.

The cost for shared maintenance and expenses comes under what is called a ‘Body Corp Fee’. This often includes insurance and sometimes council rates too. The fees can also cover lifts, shared common areas like hallways, exterior cladding, and driveways or gardens amongst other things.

The Body Corp Agreement will explain how the maintenance schedule is run, and any restrictions on your property.

It is worth asking your solicitor to check the Body Corp Agreement and give you a full explanation of how it applies to you.

Body Corp Fees can vary a lot; at the time of writing they commonly range from $2k - 12k per year. The agent for the property should be able to provide the documents that detail the costs.

From a lending perspective, it’s important to understand the Body Corp Fees as they can impact the costs of ownership, which can have a knock on effect by reducing how much we can borrow. Speak to your adviser for full clarity on this.

Stratum in Leasehold (Unit Titles)

Stratum in leasehold is similar to a stratum in freehold, but the difference is you do NOT have a shared ownership of the land underneath the building.

On top of the body corp fees, you must also pay some “ground rent” to the land owner.

These are typically a less desirable type of property as the building owner cannot control the amount the land owner wishes to charge for ground rent. When the ground rent increases, this can reduce the value of the property. Think very very carefully before entering into an arrangement like this.

Lenders are not particularly keen on this type. Please speak to your adviser before making an offer on any property type, but this one especially.

Leasehold

For leasehold properties, you own the building, but you not the land it is on. You must pay to rent the land from the land owner (someone else) for an agreed period, often several decades.

Leasehold properties usually look very affordable in the advert (suspiciously cheap!), but remember that it's essential to consider the long-term implications and potential challenges associated with lease renewals.

Since you do not own the land, there is a risk that when the land lease expires, the land owner may choose to massively increase the costs. This trap can quickly reduce the value of your property, and make it difficult to sell as willing buyers may be few.

The lack of long-term control makes leasehold one of the least desireable property types in New Zealand. I would strongly recommend speaking with your adviser and solicitor before moving ahead with this type of purchase.

Māori Land

Māori land is a unique category, representing land that has specific cultural and historical significance to Māori communities. Ownership and governance structures for Māori land are often distinct from standard property ownership models.

Respect cultural protocols and engage with local iwi or Māori authorities when dealing with Māori land.

Be aware of any restrictions on the use or transfer of Māori land.