Property Estate Types

There are multiple different types of property estates in New Zealand each carrying different benefits and challenges. It’s important to know the type of estate of the property you are looking to buy so you are fully informed about your rights and obligations and how they may affect your lending and ownership.

You can find the estate type on the property title records and will be defined on any sale and purchase agreement.

The property that you buy will be one of the following - an estate in freehold, leasehold, cross lease or stratum (freehold or leasehold). We define these below as well as comment on what you should consider for each type.

Freehold (also referred to fee simple)

This is the most common estate type in New Zealand. A Freehold Estate means you own both the land and any buildings on the property. It is the cleanest ownership stake passing the full rights of the property to the owner.
From a borrowing point of view this estate type carries with it the least restrictions and is the preferred security type for a lender.

Leasehold

A leasehold property is where you own the buildings on the property and another entity (e.g council, local Iwi, or business) owns the underlying land. The owner of the leasehold interest effectively has the exclusive rights of possession of (to lease) the land from the owner. Therefore, you must comply with the lease agreement that’s registered against the title and pay the nominated rental to the landowner.

The lease agreements on the land will vary in time and it is crucial you understand this lease well. Some leases will run for periods of 5 – 7 years and some for 99 years or ‘in perpetuity’.

Understanding the remaining term is crucial when assessing a purchase as at the end of the lease term the landowner will review the rental figure and has the rights to mark this to market (increase the rent to a market rental figure). These increases can be significant (particularly if it has been 7+ years since the last review) and it is an obligation on the leaseholder. If they cannot pay the rental amount then they forgo the rights held to the landowner in effect gifting them the buildings and fixed assets on the land. These negotiations are normally carried out in good faith and will involve an independent assessment of the market rent or dispute clauses to ensure any increase is fair and reasonable, however, the risk remains.

Given the obligations to the leaseholder this type of property is notoriously difficult to leverage. Most often (if a lender is happy to lend against the property) the loan term will be limited to the remaining term on the underlying land lease. This is to avoid a situation where the rental is increased to a point that the security becomes unrecoverable. Because of this artificially shorter loan term the amount of gearing you may be able to achieve on a leasehold property is normally low.

Crown or council land occasionally will attract a peppercorn lease for 99 years or in perpetuity. This is a simple way of stating that the leasehold interest is charged $1 per annum for the rights of the property (i.e. peppercorns in the grand scheme of things) and this figure is unchanged for 99+ years. These types of properties may enable a more traditional loan as the risk of the renewal of the leasehold interest is deferred far into the future and the annual rental is not a big impediment to purchasers.

The value of leasehold interests, as can be expected, will normally fall or become volatile as you approach the end of the leasehold term as the rental is likely to increase undermining the value of the physical assets. This is another important consideration.

Cross lease

With a Cross Lease you own a share of the land with others and you lease your house from the other landowners. Likewise, the other home owners lease their properties from you. Each lease is separately registered against their property title. Because each party is leasing from each other there is not likely any default from the landowner to the property owners.

The important consideration to have here, however, is that any improvements you want to make on the land needs to be approved by all the landowners, you do not have exclusive rights to the land your home is on. This can cause issues, particularly if you want to do any substantial development / changes to your home (i.e. an extension, deck or rebuild).

Because of the nature of land ownership this can mean lenders are slightly more cautious about lending on these titles. This, however, tends to be negligible and doesn’t form a large impediment to borrowing on these estate types.

The nature of the estate type can mean that they attract a lower market value than the equivalent property on a freehold title. There are, however, many businesses and people that specialise in ‘breaking’ cross-leases which in simple terms means changing the estate type to a freehold title. This can cost $30,000 - $50,000 depending on the complexity and may involve new services connections, survey and establishment of a boundary and consenting. It can, however, mean an immediate uplift in property value as you move from a cross lease to freehold title which may outweigh the cost.

Important to note, all leaseholders need to agree to this process which can also be challenging.

Unit title (also referred to as a ‘Strata title’)

This estate type occurs when you have a building with multiple owners such as an apartment building. It is similar to a cross lease, however, applies also to common areas of a property. A unit title means you own a part of a building (e.g an apartment) and you share ownership in the surrounding common areas like lifts, hallways and driveways. These specific estate types are normally administered by a body corporate whose responsibility is to look after the common areas of the property on behalf of the owners.

A Body Corporate is an organisation that manages and maintains common property within a residential or commercial property. Typically, you'll pay an annual fee (levy) to the body corporate, which covers expenses such as insurance, maintenance and management fees. This fee also covers services arranged by the body corporate, like rubbish collection and cleaning common areas.

These estate types can limit your borrowing capacity with some lenders restricting the LVR’s against these estate types. You will also need to allow for the body corporate levy’s when considering the purchase a unit title.

When considering a unit title property it also pays to read the minutes from the body corporate meetings as these will detail any deferred or future maintenance obligations for the building which could be a large cost depending on the building. These works also need to be collectively funded which can be constraining if you require everyone in the body corporate to chip in and some are financially not able to.

Behind leasehold, unit title estate types tend to be the least favourable of the above.

It’s important to note that beyond the above any estate title can still have registered or unregistered interests. Interests can include obligations and various rights you must adhere to and themselves can impact on the borrowing capacity or value of a property. Interests can include:

Easements – This gives neighbouring property owners or utility providers rights to use part of your land to pass over or connect to services.

Covenants – These are a legally binding promise attached against a title. This may limit the type of property you can build on the land. E.g. a promise to build your house to a similar design to other properties in a subdivision. Other examples include keeping your grass cut to a certain level, or maintenance of native bush on the land.

Building Line Restrictions – This restricts where you can build on your land. Councils could issue these restrictions to future proof widening a road so you can’t build at the front of a section.

This is a brief summary of estate types and what they may mean. When considering a purchase you should always get advice about the estate type and what that might mean from both your solicitor and mortgage adviser.

If you have any questions, please don't hesitate to reach out!