In Liow v Martelli [2026] NZCA 101, the Court of Appeal has confirmed that the long-standing Smallfield v Brown test – which for over 30 years governed disputes about alterations to cross-leased properties – is wrong in law. The decision has significant implications for cross-lease titles in New Zealand, for both cross-lease owners contemplating improvements and those asked to consent to a neighbour's plans.
Cross-lease overview
Cross-leases are a common form of residential property ownership in New Zealand. Developed in the late 1950s, they allow for separate titles to two or more units on a single section without requiring a formal subdivision. Under a cross-lease, the underlying title (usually fee simple) is owned by all unit owners as tenants in common, and each unit is leased back to its respective owner, typically for a term of 999 years. Each owner holds a dual role: as a lessor (jointly with the other owners) and as a lessee of their unit.
The form of a cross-lease is not prescribed by statute or regulation, however common features include:
Alterations Covenant: a clause prohibiting structural alterations without the prior consent of the lessors, not to be unreasonably withheld.
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Since 1991, the leading authority on when consent would be "unreasonably withheld" was the dictum of Fisher J in Smallfield v Brown (1991) 2 NZ ConvC 191, 110 (HC). Fisher J held that consent would 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." In practice, this gave objecting parties a substantial veto power against neighbouring developments; if the detriment was anything "more than trifling," consent could be withheld regardless of how significant the benefit to the party seeking change.
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Procedure for decisions: a mechanism for the lessors to act under the cross-lease where there is a disagreement.
The facts in the case of Liow v Martelli
This dispute arose between cross-lease neighbours in Remuera, Auckland. The respondents proposed to extend their dwelling, and add an in-ground swimming pool and decking bringing the building significantly closer to the boundary with the appellants' property. The appellants refused consent to the works, and the matter was referred to arbitration, where the arbitrator applied the Smallfield test and found the refusal was not unreasonable because the detriment could not be dismissed as just a "trifling detriment". Notably, the arbitrator acknowledged that had the test placed the assessment between the competing interests more evenly, he would have had "no hesitation" in finding for the respondents.
The High Court held Smallfield was wrong in law, that the Alterations Covenant did not contain the constraints that Smallfield imposes, and set aside the award. The neighbouring appellants appealed to the Court of Appeal.
Court of Appeal upholds Alterations Covenant does not give consenting lessor substantial veto power
The Court of Appeal dismissed the appeal, upholding the High Court's finding that the words of the Alterations Covenant do not give the consenting lessor the substantial veto power that the Smallfield test confers. Cross-leases are generally for around 999 years and structures will inevitably require rebuilding multiple times over that period. In that context, the Court found that it cannot be right that the purpose of the Alterations Covenant is to preserve structures in the same configuration as at the beginning of the lease. The starting point for cross-lease arrangements must be that alterations will not only be desired but necessary.
The lessors under a cross-lease act jointly. The Court of Appeal highlighted that reference to "the lessors" in a cross-lease means all owners of the fee simple as tenants in common, including the party seeking consent – who must consent or reasonably withhold consent. Individual lessors do not act separately. Where those comprising the lessors disagree, the cross-lease's procedure for decisions clause applies, typically requiring the matter to be referred to arbitration.
The new test
If a decision cannot be reached between the parties, and they proceed to arbitration, a new two-stage inquiry applies in assessing the reasonableness of any refusal to consent to proposed alterations. First, identify the concerns of the lessors. Secondly, determine whether a reasonable lessor, having regard to the interests of all the lessees and the context of the cross-lease, could withhold consent. Whether consent has been reasonably withheld is ultimately a question of fact.
The Court of Appeal found that the High Court did not err in setting aside the award. It was appropriate in this case as the arbitrator's entire analysis was predicated on the Smallfield test, and he expressly indicated he may well have reached a different result under a different test. The error of law was material to the outcome of the arbitration.
Practical takeaways for cross-lease owners and their advisers
For cross-lease owners and their advisers, the following practical points emerge from the decision:
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No baseline entitlement to refuse: A lessor does not have an automatic right to withhold consent simply because the proposed works cause them some inconvenience or detriment. The previous assumption that anything more than a trifling detriment justifies refusal no longer applies. Objecting parties must demonstrate that a reasonable lessor, considering the interests of all lessees, could withhold consent in the circumstances.
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Factors to consider: The Court identified non-exhaustive factors a reasonable lessor may weigh in making a reasonable decision to consent, including: the degree of physical intrusion into privacy and amenities of other lessees; impact on future development potential; material impact on use or market value of other units; reasonable expectations of the lessee seeking alterations; current planning laws; changes in societal expectations regarding residential property use; the counterfactual (what use could be made without consent); and whether the alterations create an additional household unit.
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Give and take: The Court emphasised the principle of "give and take, live and let live". If a lessee wishes to make alterations that are common and ordinary in the locality, it may well be unreasonable to refuse consent even if the alterations would cause more than trifling detriment to another lessee. Context matters: what is ordinary in the neighbourhood, changes in building practices, and the long-term nature of the lease are all relevant.
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Follow the contractual procedure: Where informal consent cannot be obtained, the lessee should invoke the cross-lease's procedure for decisions clause. The Court indicated that a lessee who refuses to engage constructively with proposals may find their concerns given less weight in the reasonableness assessment.
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Site coverage: The Court indicated that each lessee has a legitimate expectation that any remaining site coverage should be shared in proportion to the coverage each flat enjoyed at the time the cross-lease development was completed. Proposals that disproportionately absorb the available site coverage may be grounds for reasonable refusal.
Liow v Martelli represents a significant recalibration of the law governing cross-lease alterations. The decision removes the effective veto that the Smallfield test conferred on objecting lessees and replaces it with a flexible, fact-specific inquiry grounded in reasonableness. For the many thousands of cross-lease properties in New Zealand – particularly those with aging housing stock – the decision provides a more workable framework for navigating the improvements and rebuilds that will inevitably be required over the remaining life of these leases. Cross-lease owners contemplating works, or those asked to consent to a neighbour's plans, should seek advice on how the new test applies to their circumstances.
This article was co-authored by Alvien Benitez (solicitor).