Composition Title Information

Article Published : 09.03.2016

It is important to fully understand the nature of the title to a property prior to purchase.  "Composite titles" are nearly as common as "freehold titles" but are more complex in several ways.  We therefore believe it is worth setting out the main points of each.


Background

The most common type of title is a "fee-simple", commonly known as "freehold title".  It is certainly the simplest and in most cases the preferred type of title to have.  Where a subdivision is occurring, the usual aim would be to have freehold titles for the new lots, but this is not always possible.

Freehold titles are not available if the new lots are below the local authority's minimum area; nor are they available for the different floors in a high rise apartment block; and in cases where several units are to share a common driveway or parking area, especially if the units are also below the Council's minimum area, freehold titles with the cross easements that would be necessary are often either unavailable or too complex to be satisfactory.

In the first instance outlined above the usual solution is to produce "composite titles" also known as "ownership flat" or "cross lease titles".  In the latter two instances the usual solution is to produce "unit titles".


Freehold Titles

Freehold titles are fairly straight forward.  The title itself is often a one page document containing a brief legal land description, mention of the specific area of land involved and a plan showing the outline of the section.  Any restrictions beyond local authority zoning restrictions show on the face of the title.

No reference to any building on the land appears on a freehold title.  Such titles issue for vacant sections and do not change when a building is erected (or demolished).


Composite Titles

A composite title is made up from a share in a freehold title plus a leasehold interest in a building on the land.

In a composite title situation there is or will be always at least two and sometimes three or more buildings on a single freehold title section.  To sell each building separately it is necessary to create a separate title for it.

The separate titles are created in two steps.  First, a surveyor does a plan of the freehold section showing the exact outline of each building plus the area of land around each building which is for use with the building plus any areas to be used in common with all the buildings.  Secondly, a lease is created for each building giving the "tenant" the exclusive use of the building and surrounding land and the right to share the use of the common area.  The owner of a composite title obtains the interest as tenant under the lease of his/her own building plus a share in the freehold title.

The share taken in the freehold title is an undivided share of a size which divides the title equally according to the number of buildings which are taking separate titles.  So, if there are four buildings it will be a 1/4 share, 3 buildings a 1/3 share etc.  Being "undivided" means it is a share in the section as a whole and not a specific part of it (e.g. it will be 1/3 of the whole, not the third nearest the road).


The Lease

Most ownership flat leases are on standard printed forms.  The modern forms are not usually altered before registration because they are generally fairly acceptable.  The older leases are sometimes substantially altered and need to be carefully read to ensure they are acceptable.

The main points to note are:

  • The tenant should need the consent of all the landlords (the other flat owners) to alter the building or change its outside colour scheme.
  • Each tenant should be required to take full replacement insurance.   A burnt out shell left rotting would lower the value of other close buildings so this is vital.  If the flats are joined together sharing a common fire wall, then ideally the insurance on them both should be held with the same insurance company so that there can be no dispute between companies as to who pays for what in the event of a major claim.
  • The rights of the tenant to be left alone with no disturbance by the other tenants should be covered.   This is important because neighbours in ownership flats are usually closer than neighbours on freehold titles and, especially if there is a shared common area, there is more room for conflict.
  • Rates and services should be paid for separately by each tenant.


Alterations and Additions

The main area where problems arise with composite titles is in connection with alterations or additions done to the building.  You will recall that the first step in creating a composite title was for a surveyor to draw a plan showing the exact outline of the building.  If an addition or alteration changes that outline the plan is no longer correct and the basis of the title is undermined.

Similarly, the addition of an outbuilding such as a carport would mean the plan was no longer correct.

The remedy is unfortunately essentially to start again by cancelling the old composite title and creating a new one.  A complete new survey is required with new leases.  The written consent of the mortgagee of the flat (if any) is required and of all the other flat owners and their mortgagees (if any).  The more people involved obviously the more expensive the whole matter becomes.  We would not expect even a very simple restructuring of the title to cost less than $2,000 all up, and often as much as $3,500.

It is not open to all the flat owners to agree not to bother about changing the plans for alterations or additions because any new owner can insist the matter be put right, either by restructuring the title or, worse, reversing the alteration or removing the addition.  In any event, a faulty title would be very likely to cause problems on a sale as a purchaser's solicitor would be unlikely to approve it and potential sales could be lost.


The Benefits

Providing the nature of a composite title is understood, the benefits can be enjoyed.  Such titles allow for smaller sections than are often otherwise possible.  They also permit higher density housing which can provide security and companionship not so easily available in other ways. Composite titles are not uncommon and can be bought and sold and mortgaged easily.

Article by Simon Price

Simon is the Managing Partner at Malley & Co. He specialises in Business Transactions, Asset Structuring and Leases, and also acts generally for clients in Trust, Property, Commercial and Business Law. He has specialist knowledge in Buy/Sell Agreements for business owners.

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