The old High Court decision of Smallfield v Brown (1992) 2 NZ ConvC 191,110 has long been the leading authority on what amounts to an unreasonable withholding of consent in a cross lease context when one cross lease owner wants to develop or renovate their property. That case said that consent would be unreasonably withheld, where the benefit to the party seeking change would be substantial and the proposed alteration would produce only a trifling detriment to the neighbour. It was rather restrictive on cross lease owners who wanted to develop or renovate. That is no longer the law. A recent High Court decision changes the law in favour of cross lease owners looking to develop or renovate. We look into the new decision in this article.

In Martelli v Liow [2024] NZHC 968, the appellants had been prevented from undertaking renovations including increasing the size of the house, adding a swimming pool and new decking due to the cross lease neighbours refusing to consent. The matter went to arbitration (as required under the cross lease). The arbitrator held that the neighbours were reasonable in withholding their consent. He commented on the restrictive nature of the Smallfield case concluding that “If the law placed the fulcrum of assessment in the middle between the two competing sets of interest and concerns, I would have no hesitation in finding in their favour. But that is not the test.”

Martelli involved an appeal to the High Court from the arbitrator’s decision on the question of law regarding the Smallfield case. The High Court in Martelli concluded that ‘substantial’ benefit and ‘only trifling’ detriment should not be used as the legal test for determining whether the cross lessor has unreasonably withheld consent. Gault J considered that the Smallfield test would “add a gloss to the quintessentially fact specific assessment of unreasonableness required” under the cross lease terms. All cross lessors are required to do is to act reasonably including when considering their own concerns.

Gault J went on to say that the correct approach when considering whether the basis for withholding consent is reasonable is to consider what the reasonable landlord would do when asked to consent in the particular circumstances. The conclusion must be one that would be reached by a reasonable landlord. If the landlord or cross lessor reasonably believes that the proposed alternations would injure his interest then the landlord may refuse consent.

Martelli does not exactly provide cross lease owners with the definitive answer they might be looking for when considering these issues of consent to alterations. It strips the matter back to a factual assessment of what is reasonable in the circumstances. This does not provide owners with guidance as to what is reasonable. It is unfortunate that this area of law is largely dealt with behind closed doors by arbitrator’s private decisions which makes it difficult for cross lease owners to look at case law for factual precedents.

For cross lease owners looking to develop, Martelli does appear to make things easier for a cross lessor looking to alter or develop their property now that the trifling detriment requirement is removed. There is no longer a gloss placed on the “reasonable” requirement in the cross lease. This means that if the question comes before an arbitrator, the arbitrator is now required to consider both parties’ interests equally. At Urlich Milne, we consider building up and blocking a neighbour’s sea view is likely to be unreasonable but adding an extension to your house on your restricted use area may not be unreasonable if it does not significantly interfere with the cross lease neighbour.

If you have a cross lease dispute with your neighbour or perhaps you are looking to alter your dwelling on a cross leased title or you are concerned about the implications of the new law for your neighbours’ potential developments, then get in touch with us at Urlich Milne. 

This article has been published for general information purposes only. It is not, nor is it intended to be, treated as legal advice.

Contributed by Oscar Ward - Senior Associate