Court of Appeal ends cross-lessors’ stranglehold control over renovations

Introduction

As of 2017, 215,000 New Zealanders own houses on cross-leases (Auckland: 100,148; Christchurch: 32,566; Tauranga: 9,372).¹

In most cross-leases, the cross-lessee must obtain the cross-lessor’s consent to undertake any external alteration of their home (called a flat in the cross-lease). The cross-lessor’s right to refuse consent has been a source of much conflict and litigation.

For nearly 40 years, the High Court’s decision in Smallfield v Brown² has been the leading authority on how a cross-lessee can renovate or extend their home. In Smallfield, the Court set a test (discussed below) that prioritised the cross-lessors’ preferences.

In April 2026, the Court of Appeal, in Liow v Martelli³, overturned Smallfield and set a more even test that considers whether a reasonable lessor would consent, based on a broad range of fair considerations, including what is normal for an area.

This article considers cross-lease tenure, the outcomes that the Smallfield test could produce, and the key considerations under the new law.

Cross-leases

Under this form of land ownership, the registered proprietors collectively own the underlying section (fee simple) in undivided shares. The collective owners lease exclusive areas of the section to two or more of the individual owners (usually for 999 years) (hence the name “cross-lease”).

The cross-lease contains the terms which govern the parties’ rights and obligations.

The form of cross-lease memorandum that is most adopted says that a cross-lessee may not alter the dimensions of their flat without the cross-lessors’ consent; however, the cross-lessor cannot withhold consent unreasonably.

Smallfield v Brown

In 1991, in Smallfield, the High Court set a “trifling detriment” threshold for what amounts to reasonable withholding of consent:

Whether or not consent has been unreasonably withheld requires first that some proposition is put to the relevant lessee for the purpose of triggering an obligation not to unreasonably withhold consent and secondly that after due balance of the interests of the two parties the withholding of the consent is found to be unreasonable. Although the latter involves a comparison between the interests of both parties I think that a consent will be unreasonably withheld only where the benefit to the party seeking change will be substantial and the proposed alteration would produce only trifling detriment to the neighbour. (sic)

The passage’s final sentence has become the law.

Smallfield empowered cross-lessors to veto any alteration (however reasonable in the circumstances) because almost any paltry or insignificant detriments could satisfy the test. For instance, an objecting cross-lessor might claim that more than a trifling detriment results from contractors using a shared driveway to deliver materials during construction; an extension might cast a shadow over a corner of a garage in winter, or children might bounce balls on a new deck (once completed).

The cross-lessors may also say that the proposed alterations would not generate a substantial benefit to the cross-lessee.

The facts in Liow v Martelli

In 2017, the Liows purchased the cross-lease to a house in suburban Auckland. The Martellis owned the lease to the other cross-lease for the section.

Without seeking consent from the Martellis (Mr Martelli is a lawyer at Martelli Yaqub), the Liows demolished a smaller uncovered deck at the northern end of the house, built a 24.6 m² covered deck less than 1 m from their northern boundary, and built a lower, uncovered deck towards the Martellis’ house. The Martellis did not object (the Court of Appeal’s decision says, prima facie, reasonable neighbours should try to “live and let live”).⁴

The Liows also said that as soon as they could afford it, they intended to extend their house by adding a 30 m2 bedroom toward the Martellis’ leased area.

In 2021, the Martellis asked the Liows to consent to their proposed renovation: extending their lounge over their backyard toward the Liows’ house, installing a pool and a deck (connecting the lounge and the pool).

The Liows objected, saying it would cause them more than a trifling detriment. For instance, the construction work would disrupt them and, once finished, the deck may become a focal point for socialising.

Arbitration 2022

The Martellis challenged the Liows’ refusal in arbitration. The learned arbitrator found in favour of the Liows. He said he had to follow the Smallfield test, and the Liows’ complaints met the trifling detriment threshold. The Martellis appealed the Smallfield rule to the High Court.

High Court 2023 to 2024

In 2023, the High Court (Justice Anderson) granted leave to appeal the law in Smallfield.

In 2024, the High Court determined the appeal. Justice Gault held that the Smallfield test imposed an unjustified gloss on the quintessentially fact-specific assessment of unreasonableness required under clause 10 of the lease. The High Court remitted the matter to the arbitrator. The Liows did not accept that position, and they appealed.

Court of Appeal 2025

In the Court of Appeal, the Liows’ King’s Counsel argued that the High Court was wrong to displace Smallfield (e.g., arbitrators will have applied Smallfield for over 35 years, so it provides certainty). And, if the Court of Appeal were to set a new test, it should not allow the arbitrator to reconsider his decision under the new law.

The Court of Appeal dismissed the Liows’ appeal and remitted the case to the arbitrator.

In doing so, the Court of Appeal discussed the factors indicating when it is reasonable for cross-lessors to withhold consent. The judges endorsed the analysis of Associate Professor Rod Thomas, who said:⁵

The weighting given to each concern should sensibly also vary from case to case. A likely increase in value to the improving owner resulting from the proposed development proceeding may be given weight where it is common for alterations of the envisaged nature to be undertaken in the locality, or where a reasonable cross-lease neighbour would consider the proposed changes acceptable. On the other hand, consent may be reasonably withheld where the changes will result in a tangible diminution of property values or a reduction in the disaffected owner’s physical enjoyment of the property in a manner not reasonably acceptable.

The Court of Appeal then provided a non-exhaustive list of matters the reasonable lessor could take into account:

1. the degree of physical intrusion into the privacy and other amenities, such as light and view, of other lessees;
2. 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;
3. whether the proposed alterations or additions have a material impact on the use or amenities of the other lessees;
4. the impact on the market value of the other lessees’ flats;
5. the reasonable expectations of the lessee seeking to make alterations in respect of the enjoyment of their flat;
6. the current planning laws applicable to the area;
7. changes in societal expectations with respect to the use of residential properties;
8. the counterfactual to the cross-lessors’ objections — 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
9. whether the alterations or additions will create an additional household.

Crucially, the Court of Appeal ended its discussion of this topic by emphasising that all the fee simple owners (in their joint capacity as “the lessors” of the flats) must consent (or reasonably withhold consent) under the alterations covenant, not just the cross-lessees in the Liows’ position (as had occurred under Smallfield).

Conclusion (and a question about the future)

The Court of Appeal has set a test of reasonableness in all the relevant circumstances (not whether one side will suffer more than a trifling detriment). Also, whether a lessor has withheld consent reasonably is ultimately a question of fact.

Flat owners who wish to improve and extend their homes (and who fall within the reasonableness indicators set out by the Court of Appeal and Associate Professor Thomas) will welcome the decision.

It seems an open question whether cross-lessees who continue to face opposition to ordinary renovations will need to apply to the High Court for orders under section 339 of the Property Law Act to sever the cross-lease, c.f. Turner v Goldsbury [2024] NZCA 292. We hope that the Court of Appeal’s decision in Liow will make those applications rare.

1. Craig Fredrickson Arrested (re)development? A study of cross lease and unit titles in Auckland (Auckland Council | Te Kaunihera o Tāmaki Makaurau, Technical Report 2017/025, October 2017) at p.130.
2. Smallfield v Brown (1991) 2 NZ ConvC 191,110 (HC).
3. Liow v Martelli [2026] NZCA 101.
4. At [107].
5. Rod Thomas “Cross Leases” in Elizabeth Toomey (ed) New Zealand Land Law (3rd ed, Thomson Reuters, Wellington, 2017) at 1181.

For questions about the decision and its implications for your extension, please contact Tim Donaldson (021 416 694), Aaron Yaqub (021 169 1826), or Brett Martelli (021 023 88 446).