When purchasing a property, one of the first documents your lawyer should review is the Record of Title and any registered interests. While many purchasers view the title as simply confirming ownership, a title search can reveal important rights, restrictions, obligations, and risks that may affect the property. These can ultimately affect the value, use, and future development potential of the property that may not be obvious from a property inspection. Understanding these matters before a contract becomes unconditional is imperative to avoiding costly surprises.
As part of due diligence before purchasing a property, reviewing the title will reveal:
- the type of estate being purchased, for example freehold, leasehold, unit title or cross lease estates;
- if any interests are registered against the title; and
- whether there are any restrictions affecting the property.
The process often involves more than simply reading the title. Many registered interests refer to legislative provisions or refer to separate instruments which record the detailed rights and obligations associated with those instruments in a separate document. These documents should also be reviewed.
Easements
Easements are among the most common interests recorded on a title. An easement grants rights to other title owners or third parties to use the land for a specified purpose, but not possession of it. Examples of common standard easements include rights of way, rights to convey and drain water, rights to drain sewage, and rights to convey gas, electricity and telecommunications.
Shared Driveways
If access to a property is via a shared driveway, it is important to understand the specific legal rights and obligations concerning the use and maintenance of the shared driveway.
A right of way is a type of easement that grants access over a parcel of land owned by one title, which is not vested as road. An alternative to a right of way is a jointly owned access lot, where all owners of the titles which share the use of the shared driveway would jointly own an equal and undivided share in the parcel (known as an Access Lot).
Although shared driveways are common, potential misunderstandings and disputes arise where owners (or their tenants) rely on inaccurate marketing information or make their own assumptions rather than rely on proper legal advice. Purchasers should understand:
- who has usage rights;
- who is responsible for maintenance and repairs;
- if the driveway is damaged or in need of repair, how are repair costs shared or allocated between the owners; and
- whether there are any competing or conflicting rights granted within the same driveway area, for example, a right for owners or their visitors to park on any part of the shared driveway.
Encumbrances and Ongoing Obligations
An encumbrance is a registered interest that imposes obligations on the owner of the land which can be enforced by a third party chargeholder. Unlike a mortgage, which is generally discharged by the vendor on settlement, most encumbrances remain registered against the title following settlement and continue to bind future owners. As they typically rank ahead of a new bank mortgage, it is important for purchasers to obtain their lender’s approval of encumbrances on the title to avoid delays on settlement.
Encumbrances are often used to enforce ongoing maintenance requirements, contributions towards shared infrastructure, restrictions on land use, compliance obligations and/or to require a purchaser to become a member of a residents’ society.
Land Covenants
Land covenants are positive or negative promises which run with the land and bind the owners of a title. They can be granted in favour of the owners of another title, or to a third party.
Land covenants are often used in modern residential subdivisions, particularly where bare land sections are being sold by a land developer. These covenants regulate what future owners can and cannot do with their land and can significantly affect future building or development plans.
Typical covenants could impose design controls, specify the types of building materials to be used for proposed buildings, restrict the keeping of animals and pets on the land, and specify permitted or prohibited uses of the land.
Consent Notices and Land Use Restrictions
A consent notice is typically registered on a title as part of a subdivision and records the conditions imposed by the relevant Council when granting a resource consent, which will often be binding on future owners.
Typical conditions could include the ongoing protection and maintenance of vegetation or environmental features, drainage infrastructure and flood prevention, geotechnical requirements for design and building consent applications, or other ongoing land-use restrictions.
Boundary Issues and Physical Discrepancies
A title and its boundaries may appear clear within a title search while the actual property and structures on-site tell a different story, whether due to subsequent alteration, inaccuracy, mistake or natural movement of the land over time.
Care should be taken to ensure that the physical structures and boundaries (including buildings, fences and retaining walls) align with the deposited plans attached to a title, such that there are no encroachments (including above or below ground).
For cross-lease properties, purchasers should compare the flats, exclusive use areas and common areas against the flats plan. Alterations to buildings or structures that are not reflected on the flats plan may render the flats plan as being defective and may affect future resale. Similarly, for unit title properties, purchasers should compare the principal unit, accessory units, and common property shown on the plan to ensure there are no encroachments or discrepancies.
Mortgages
A vendor is generally required to discharge any mortgage on or before settlement so that clear title can be transferred to a purchaser. Mortgages do not ordinarily prevent settlement provided appropriate discharge arrangements are in place.
Care should be taken if there are known concerns that a vendor is under financial distress, particularly if the purchase price is unlikely to cover the vendor’s outstanding debts.
Requisitions as to Title
One of the most important reasons to review a title and any registered interests promptly is the limited timeframe (of up to 10 working days from the date of the agreement being signed) that a purchaser has to requisition the title under the ordinary agreement. A requisition can only be validly raised if there is a defect that makes the vendor’s title materially different from the title that is contracted for.
Purchasers should note that under an auction agreement, the purchaser is deemed to have accepted the vendor’s title by bidding, and an ordinary agreement can also be amended to delete the purchaser’s right to requisition the title which would otherwise be available.
Final Thoughts
A thorough legal review of both the title and any registered interests can help purchasers identify potential risks before they become costly problems. Before committing to a property purchase, ensure the title is carefully reviewed and that any issues disclosed by the title are fully understood.
If you have any questions about property titles and the process, 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.
