Our German Desk
From time to time a cross-lease property owner may be asked by their cross-lease neighbour for their consent to specific matters, such as proposed structural alterations or additions to their neighbour’s property. We consider the owner’s obligations and grounds for refusal.
What are my obligations under the cross-lease?
Most cross-leases include a covenant that a cross-lease neighbour must first obtain the written consent of all the cross-lease property owners before making any alterations to their property or to the common areas, with the proviso that their consent cannot be unreasonably withheld. If the lease is silent on this point, cross-lease property owners may still be prevented from unreasonably withholding or delaying their consent under the Property Law Act 2007. The difficulty for most cross-lease property owners however is that the cross-lease itself does not define what is unreasonable.
So, in what circumstances can I refuse to give my consent?
The leading authority for the past 30 years was the case of Smallfield v Brown (1992) 2 NZ ConvC 191,110 where the judge said that there needed to be a balancing of the interests of both parties to determine whether the withholding of the consent is unreasonable. Consent will be unreasonably withheld only where the proposed alterations would produce a substantial benefit to the cross-lease property owner making the alterations, and only a trifling detriment to the (un)consenting cross-lease neighbour. This set the bar very high as the mere trifling detriment test allowed a neighbour to withhold consent to proposed works even though there was little material detriment to them. Each subsequent case was decided on their specific facts so it was not clear if a similar factual scenario would result in the same outcome.
A change in the law?
In Martelli and Keith v Liow and Tan [2024] NZHC 968 Justice Gault was asked to revisit the Court’s decision in Smallfield v Brown. The case involved a dispute between two cross-lease neighbours as to whether the refusal of one neighbour to the extensive renovations of the other was “unreasonable”. The lease included a clause that prohibited structural alterations or erecting structures without the consent of the other cross-lease owner, with the proviso that consent could not be unreasonably withheld. The owners of Flat 1 (Martelli and Keith) requested consent from the owners of Flat 2 (Liow and Tan) to the proposed alterations to the back of their flat that included (amongst other things) increasing the house size by 54m2, bringing it closer to the boundary with Flat 2 to 1.4m, adding an in-ground swimming pool of 27.2m2 one metre from the boundary, adding new decking of 28.8m2 to connect the house and the pool, and removing the separate garage. Despite the owners of Flat 2 having made their own unconsented alterations to their flat two years earlier, they refused to give their consent to the proposed works.
The parties took their dispute to arbitration as required under their cross-lease and the arbitrator held that, based on the test in Smallfield v Brown which places the fulcrum of assessment towards the Flat 2 owners’ perspective, while he was ambivalent about some of Flat 2’s arguments, he could not dismiss them as being mere trifles, and accordingly the withholding of consent by the owners of Flat 2 was not unreasonable.
Justice Gault confirmed that determining whether consent was unreasonably withheld in a contractual setting generally involves a two-stage inquiry. First, into the actual basis for withholding consent, and secondly whether that basis objectively provides reasonable grounds for withholding consent.
The new test
After considering the lease, Justice Gault considered that the old test was not correct, and that the correct approach when considering whether the basis for withholding consent was reasonable is to consider what the reasonable landlord would do when asked to consent in the particular circumstances and whether the conclusion was one that could be reached by a reasonable landlord. In other words, the cross-lease neighbour is only required to act reasonably, including when taking into account their own concerns. Justice Gault referred to the case of Louis Vuitton New Zealand Ltd v Prince’s Wharf Property Fund Ltd (2005) 5 NZ ConvC 194,073 (HC) where Justice Winkelmann said that if the landlord reasonably believes that the proposed use would injure its interest, then the landlord may refuse its consent. Justice Gault was not confident that, in light of his decision, the arbitrator’s result would be the same and remitted the case back to arbitration.
In our view the new test has the potential to make it easier for a cross-lease owner to make structural alterations or increase the size of their property, as they no longer need to show a substantial benefit to themselves, and the party whose consent is required cannot refuse because it has more than a mere trifling impact on them. Rather, those neighbours must reasonably believe that the proposed work would injure their interest in the property.
It will be interesting to see how this new test will be applied in future cases.
If you have any questions about consent in respect of your cross-lease property, please get in touch with our Property Team or your usual contact at Hesketh Henry.
Disclaimer: The information contained in this article is current at the date of publishing and is of a general nature. It should be used as a guide only and not as a substitute for obtaining legal advice. Specific legal advice should be sought where required.
