TelferYoung Limited
Changing Forms of Property Ownership
10 November 2006
A summary of some of the different forms of residential ownership.
The different forms of ownership have resulted in the changing need from property ownership. Changing lifestyles and high density residential properties has created new challenges for property ownership. We have summarised some of the forms of ownership within a residential context.
Traditional Freehold
Commonly known as the Certificate of Title which has now been renamed the Computer Register by LINZ (Land Information New Zealand). LINZ has introduced a computerised land ownership information base including documents such as right of ways, easements and other interests which are registered on the Computer Register.
Cross Lease
Owners lease differing parts of the property to each other. These tend to be a 999 year term. The cross-lease has developed from what was commonly known as undivided half-share to a newer style cross-lease with restrictive use areas to provide some definition of the quantum of land associated with each lease. The addition of garages, carports and extensions to homes has produced a large number of cross-lease documents and lease plans which now do not reflect the improvements on site.
Whilst Local Authorities do issue Land Use / Building Consents and Codes of Compliance for these works, this system has no cross reference to the legal ownership or changes to the Certificate of Titles / Computer Register for the property. These issues are commonly known in the marketplace and the latest version of the standard Real Estate Agreement now has a special clause which refers to cross-leases.
To remedy defective titles requires re-surveying and updating of the lease documents. Costs can increase significantly where there are multiple owners or leases to deal with. There has been a trend of other clauses being entered into such documents such as the keeping of dogs or other pets, or in one local case the property could not be rented and must be occupied by the registered owner.
Company Ownership
The property is owned by a company and the owners have company shares. This form of ownership is complicated by the relationship between the owners and their lenders and the division of liabilities, etc. This form of ownership has had limited use in the market.
Unit Titles
The Unit Titles Act is now 30 years old and the Act is under review with submissions for enhancements in 2006. Unit Titles have been used for a large number of multi unit or high density developments which allows a three dimensional plan of property with common areas being identified. These are referred to as Principal and Ancillary Units or Accessory Units. The combined ownership requires the property to have a Body Corporate and a set of Body Corporate Rules. Standard rules described by the Act cover the insurance of the building and some administration issues. Within the Act a Body Corporate Secretary needs to be appointed. This person has limited powers and some statutory requirements and is not responsible for addressing many other issues unless the owners delegate added responsibilities and change the Body Corporate Rules accordingly.
The variations to the Body Corporate Rules should reflect their efficiencies to enable effective administration and some mechanisms dispute resolution between proprietors and the rights and obligations of collective ownership including sinking funds for maintenance. Body Corporates have now evolved to address a lot of the issues not covered by the existing Act. However, many do not have mechanisms for external repainting, control of external colours and maintenance obligations which if left unaddressed for a period of time can impact on property values.
Many of the apartment complexes are in Unit Titles and with resort styled properties having on-site management for day to day maintenance, and renting of vacant units. These management contracts can also have an impact on property ownership, not only in the cost structure but the ability to rent or lease the property may or may not substantially enhance ownership.
There would appear a similar objective in all forms of ownership to provide a positive experience from property ownership. The issues facing the modern higher density are different to single ownership and sole responsibility.
Maintenance
To maintain the value of the property over a period of time requires well structured maintenance on a day to day basis, and adequate controls of external painting and colouring and may go as far as colours of canvas awning attachments, curtain linings, colour of exterior lighting, variations of letter boxes, placement of clotheslines, etc. The contribution to a maintenance fund (known as a sinking fund) for future capital works is highly desirable for external painting, lifts and periodic planned maintenance.
Management
That owners have to agree on a process that provides an adequate management plan to protect the value and enjoyment from the property.
In some cases an owners committee can be formed to complete some items or an owner can be the Body Corporate Secretary. Often the size of the complex/style of the complex and the interest of the owners to be involved will determine the management options.
Managed complexes provide a large variation of fees and related costs.
Although this type of information would appear simplistic and common sense, its availability in the market place can be difficult to acquire.
Value
The costs to provide sinking funds for exterior maintenance, sinking funds for chattels replacement and administration cost can be considerable. If the property is in an income producing situation, the division of income between the units available for rent, can be a pooled rental or the income can be directly associated with the units income on an individual basis. It is unfortunate that this information is often very difficult to acquire.
A statement of financial records or budget for the coming year or planned maintenance in the coming years, can also be difficult to obtain when purchasing a property. If issues become known in the market place saleability of any of the units can be more difficult. It appears good management is essential for long term value protection.
If a building has an established maintenance fund one would expect that purchasers would view the property more favourably. The likely scenario is that building with large costs due will have more difficult in selling and impact on value, and the general public view of this type of property which can impact on the total sector. It might be easier to get all owners to agree to fund $100/month than a lump sum contribution.
Fractional Interest
Multiple owners are now common with apartment style living with each owning a defined area.
A fractional interest is where there are many owners for one defined area, this is illustrated by the 'time share' concept with each owning a period of time often one week.
We have seen one-quarter shares in properties in the market having rights of one week in four. This type of ownership in a resort location was easily understood and this co-ownership appears attractive and more affordable. The proposed mechanism for ownership is for the multi unit property to be unit title and then each unit owned by a company structure, with each having a 25% shareholding and being a company director. The layering of the differing forms of ownership adds to the complexities and many potential purchasers many not be able to foresee the circumstances that the documentation would apply to.
The yearly servicing, management fees and compliance costs should be considered with this form of ownership. The other option is a proportional share which a title can be issued for. This is common in commercial property syndication.
Conclusion
The traditional Freehold Certificate of Title has evolved over hundreds of years which was inherited from the English Deeds system and is well tested by case law and the registration of interests such as easements and rights of way are commonly understood.
It would appear that unit titles is the common structure of property for high density living in multiple ownership buildings. Each case would need to be assessed on its merits and strength of its documentation. Whilst many are well prepared, the consumer or potential property owner should consider if that structure will provide good management and enhance the value over the longer term.
The properties with multiple ownership and those with a well structured maintenance and management plan should be more attractive and enhance their saleability and value or those buildings without well structured ownerships may become more difficult to sell. The review of the Unit Titles Act may produce important changes and if any of the new rules are to be applied to existing Unit Title properties.
We are aware of submissions for the review of the Unit Titles Act to make maintenance and sinking funds compulsory and to address the new forms of property ownership.
It would appear that robust structures need to be put in place for the protection of consumers and to enhance new forms of ownership to show a difference between tested and untested structures. The development of these complexes without robust structures run the risk of adverse comment and this may effect the overall market confidence in this sector. With an aging population that is likely to require new forms of housing. However, the confidence of the high density housing maybe at risk if new forms of ownership fail to perform, i.e. resolve conflicts, building maintenance and enhance property values.
The best way of making money from your property investment is to make the right decision and be informed before you buy.
Roger Gordon
This monthly paper reflects the views of the writer and may not represent the views of all TelferYoung staff.