When is consent unreasonably withheld to structural alterations on a cross-leased property - Liouw v Martelli – Court of Appeal.

In this month’s article I review new Court of Appeal authority which changes the common law position as to what will be considered unreasonably withholding consent to alterations to a property on a cross-leased title.  

As set out by the Court of Appeal, under a cross-lease scheme, the fee simple or other underlying estate in the land is owned by the owners of the flats as tenants in common, and all the tenants in common join in leasing each flat to its owner, normally for 999 years. This means that each purchaser of a “flat” becomes the registered owner of a proportionate undivided share in the fee simple (or other underlying estate) as a tenant in common with the “owners” of the other flats; and an estate of leasehold in their particular flat.

Facts.

  • The Respondents bought their Remuera property in 2011. The Appellants bought the neighbouring property in 2017. Both properties were on the same cross leased fee simple title.

  • Each cross lease included the standard clause not to make structural alterations without prior consent of their Lessor, such consent not to be unreasonably withheld.  

  • The Appellants in 2018 had previously demolished a small existing deck at the northern end of their leased property and replaced it with a much larger deck which was less than 1 metre from their northern boundary, without lessors’ consent.  

  • In 2021 the Respondents proposed to develop their leased property by:-

a) Increasing the size of the existing 114.5m2 house by 54m2 to 169m2 , bringing it closer to the Appellants leased property;

b) Adding an in-ground swimming pool of 27.2m@ 1 metre from the boundary;

c) Adding new decking of 28.8m2 to connect the house to the swimming pool; and 

d) Removing the separate garage (in order to avoid taking what might be regarded as site coverage of the Appellants). 

  • The Appellants refused to provide consent to these development works.  

The cross-lease was subject to an arbitration clause, and the Arbitrator, applying the prior authority of Smallfield v Brown determined that the consent was reasonably withheld as the detriment to the Appellant was “more than trifling”. That was so even though the benefits to the Respondent was more than significant.  

This was appealed to the High Court on a question of law, namely whether the test applied from Smallfield v Brown remained the correct test.  Justice Gault ruled that the wrong test had been applied and the proper test for determining whether consent had been reasonably withheld was to consider what the reasonable lessor would do when asked to consent in the particular circumstances, and whether the conclusion was one that could be reached by a reasonable lessor. The case was remitted back to the Arbitrator to reapply this test.  

However, the Appellant interceded before this could happen and appealed this legal finding of the High Court. It came before the Court of Appeal for determination as to what test ought to be applied to assess whether consent had been unreasonably withheld.  

A key finding by the Court of Appeal was that with cross leases, alterations will be desired and necessary over the terms of its lease being 999 years. The test in Smallfield v Brown was considered untenable to apply over the course of a cross lease term. Further it commented that it would be untenable if lessees could not take advantage of changes in architectural and building practices so as to optimise residential dwellings. It then attempted to define the circumstances that a reasonable lessor should take into account in considering whether its consent ought to be provided or withheld:-

a) the degree of physical intrusion into the privacy and other amenities, such as light and view, of other lessees; 

b) the impact on the possibility of future development of another lessee’s flat (and any appurtenant restricted use areas), for example by reducing the overall site coverage available for such development; 

c) whether the proposed alterations or additions have a material impact on the use or amenities of the other lessees; 

d) the impact on the market value of the other lessees’ flats; 

e) the reasonable expectations of the lessee seeking to make alterations in respect of the enjoyment of their flat;

f) the current planning laws applicable to the area; 

g) changes in societal expectations in respect of the use of residential properties; 

h) the counterfactual — that is, the use that could in any event be made of the lessee’s flat and restricted use area, for example by placing a freestanding swimming pool on the restricted area as opposed to building an in-ground one, or being able to use the restricted area for socialising even without building a deck; and 

i) whether the alterations or additions will create an additional household unit.

Ultimately, the Appellant was unsuccessful, and the High Court’s decision stood such that it was sent back to the Arbitrator for effectively redetermination based upon a different test being applied. It seems likely that if the Arbitrator applies the test as formulated by the High Court and Court of Appeal, the withheld consent of the Appellants will be determined to be unreasonably withheld. 

Note: This article is not intended to be legal advice (nor a substitute for legal advice). No responsibility or liability is accepted by TM Bates & Co. or Building Today to anyone who relies on the information in this article.