ENCUMBRANCES - by Fiona McConochie   

 What is an Encumbrance?

 

Encumbrance Instruments are provided for in Part 6 of the Land Transfer Act 1952 (the “LTA”). An Encumbrance is a mortgage for the purposes of both the LTA and the Property Law Act. It is designed to secure rentcharges or annuities. A rentcharge is a sum of money paid periodically to someone who is not entitled to any future estate in the land, that is, the reversion or the remainder. An annuity is a sum payable yearly as a personal obligation of the grantor or out of property not consisting exclusively of land. These types of interests, inherited from English property law, are not common in New Zealand.

 

  1. How are they used now in New Zealand?

 

Encumbrances are now commonly and predominantly used by way of a rentcharge to secure collateral covenants, primarily covenants in gross that are not otherwise registerable. This practise developed many years ago and has now become commonplace.

 

Most usually the parties sign a Deed of Covenant, and in that document agree that an Encumbrance Instrument will be registered on the title to secure performance of the commitments in the Deed of Covenant. Once registered the Encumbrance Instrument provides public notice of the commitments of the landowner, which can be especially important in the case of someone looking to purchase the property. The Deed of Covenant and accompanying Encumbrance Instrument would also be held on the property file at a Council and would be included in property information contained in a LIM.

 

  1. Examples of the use of the Encumbrance mechanism:

 

Examples of use of the Encumbrance mechanism include:

 

-        Use in a subdivision to require owners of the lots to join a residents’ association and pay annual fees;

-        Use in a subdivision to require owners to enter into contracts with a utility provider and pay charges for the use of the facilities;

-        To provide that a boatshed be placed on one lot in a subdivision, the owners in the development being shareholders in the jetty;

-        To set out restraint of trade provisions in relation to a piece of land;

-        To provide for the obligations of a landowner using adjoining road reserve or Council land for such matters as building a retaining wall or a parking structure.

 

  1. Issues with the use of the Encumbrance mechanism:

 

There are a number of potential issues with the use of the Encumbrance mechanism because it is commonly being used for a purpose it was not designed for. There has been a lack of clarity about its status. The use of the encumbrance instrument confers the benefits of registration on covenants in gross when they may only have a tenuous connection with the land (for example the restraint of trade previously referred to). They are treated as mortgages but there are problems with applying the rules related to mortgages to an interest that, in reality is not a mortgage (e.g. mortgagee sale provisions).

 

  1. Encumbrances as registered instruments:

 

Covenants in gross cannot be registered or notified on the register to titles to land in New Zealand except in certain limited statutory circumstances (such as under the Resource Management Act or the Conservation Act). In contrast, rentcharges are registered by means of an Encumbrance Instrument and once registered are indefeasible. This means that the covenants secured by the encumbrance mechanism run with the land. Further, the encumbrance itself cannot be set aside.

 

  1. Comparison with Easements

 

It may be that some “covenants” may be able to be registered as easements depending upon the wording in the particular case, and Maurice will talk more about easements shortly. Easements do require a defined area on a survey plan (unless the whole title is subject to the easement), where Encumbrances may have a plan attached that is not surveyed. If it is possible to register an easement, this would generally be recommended, given that easements are specifically provided for in the LTA and the Property Law Act.

 Future of Encumbrances in New Zealand & Proposal to implement statutory covenants in gross

 

The Law Commission has recently considered the use of Encumbrances to register covenants in gross. The proliferation of covenants in gross on the register and the lack of a specific statutory mechanism for their notification indicates that there is a high demand for these types of interests to be able to be entered on the register, which the LTA and the Property Law Act are not meeting currently. In light of this, the Law Commission believes there is a strong case for express recognition of covenants in gross to ensure their validity and to make their creation transparent.

 

EASEMENTS - by Maurice Higgs

 

INTRODUCTION

This paper is not comprehensive but touches on most of the matters that we deal with regularly.

 WHAT IS AN EASEMENT?

 

A registered right enabling use of land by another but not giving that other person rights of occupation e.g. right of way etc. It does not include any right to have possession of the land or to take anything from the land. 

 

An easement may be created over part/one piece of land (the servient tenement) in favour of another piece of land (the dominant tenement) OR may be granted in gross i.e. over a piece of land in favour of an individual or body corporate e.g. drainage rights granted to Councils.

 

Historically, in NZ, easements were created by Transfers granting or reserving the easements or on deposit of a plan where rights implied by Section 168 of the Land Transfer Act 1952 were created.(Before the current legalization dealing with easements on plans of subdivision came into force)

 

In 1961 the use of Easement Certificates was introduced in NZ, by an amendment to the Land Transfer Act 1952. With use of these, the easements were not deemed to be created/have come into force, until one or other of the affected Lots was transferred into separate ownership. Also at that stage easements in gross could not be included in an easement certificate and according to law, an owner of land could not grant an easement to themselves.

 

With “private” subdivisions the easements in gross in favour of (for example the Council) could be created prior to dispositions, by transfers by the owner granting the easements in gross in favour of the Council.

 

However for Councils, this was an issue when Council owned land was subdivided; i.e. the easements in gross to be in favour of the Council, could only be created by means of the transfer disposing of the separate allotments, as they were sold off.

 

Subsequent changes to the legislation have meant that easements in gross can now be included in an easement instrument.

On registration of any easement instrument the easements are now deemed to be created, regardless of whether or not the all of the land in the affected titles is owned by the same person.

 

As a result of the changes to the legislation, the use of transfers granting or reserving easements is less common, under the NZ provisions for easements.

 

As we know, where easements are to be created over part of a parcel of land, a Land Transfer plan defining the part to be affected is required.

 

TYPES/PURPOSES OF EASEMENTS (NZ)

 

The Land Transfer Regulations 2002 refer to specific classes of easements (Rights of way, rights to drain water, Rights to convey water, rights to drain sewage, Right to convey electricity, Right to covey telecommunications and Computer Media, Right to convey gas). The Regulations also set out the implied rights applicable to those easements.

 

Use of Easement Instruments that state that these rights are applicable, means that the rights do not have to be repeated in the Easement Instrument itself (saves on paper work).

However the Easement Instrument creating the rights for those specified classes of easements, can state that all of those rights are applicable or can vary, negative or add to those rights.

 Registrable easements are not limited to only the classes of easements referred to in the Land Transfer Regulations. Many types of easements have come into being by common law recognition/recognition by the Courts

 RURAL EMANANTIONS

The most common easement used in our area, not included in the classes of easement specified in the LT Regs, seems to be what is often referred to collectively as “Rural Emanations” easements. However there is no statutory definition of “Rural Emanation Easement”, therefore the actual purpose of the easements must be specifically referred to as a recognized right capable of being an easement

 

e.g. the rights for an owner of land to allow agricultural and horticultural sprays to drift over adjoining land, from the land on which the sprays are applied.

 

These are particularly useful in rural areas where land is being developed, but where farming activities are being carried out.  Any person buying land affected by these easements (or any easements) is made clearly aware of the existence of these when they search the title.

 

Like other easements, these can be included in an Easement Instrument. LINZ does not actually require the detailed terms of the easements to be spelt out in the body of the Easement Instrument (The Registrar of Land made a ruling on this several years ago). However obviously it would be very unwise not to include in the easement instrument, the full details of the terms of any easement not specified in the Land Transfer Regulations.

 

It is not unusual for some of the specified terms in the Land Transfer Regulations to be adopted into Easement Instruments that are not referred to in the LT Regs classes of easements.

e.g. an Easement Iinstrument creating easement to allow the drift of sprays, could also contain a statement that “The disputes provisions set out in cause 14 of schedule 4 of the Land Transfer Regulations 2002 are applicable to the easements created”.

 

For this type of easement, all of the land in the title over which the sprays are allowed to drift is the servient tenement. Although the easement is over all of the land, it does not restrict the owner of that land from continuing to use the land in the normal way.

 

All easements when created have the effect of diminishing the rights of the owner of the land over which they are granted; i.e. the registered easements allow the grantee to exercise rights over the land of the grantor, but this must not be to the exclusion of the occupation/use by the grantor and must not amount to “dual occupation” by the grantor and grantee. (See later comments re right to park)

 

EXAMPLES OF SOME LESS USUAL EASEMENTS

 

  1. REGISTERED IN NEW ZEALAND

 

  • Right to land and take off in aircraft

 

  • Right to enter on land for the purposes to inspect, repair and maintain the wall on adjoining land

 

  • Right of support (soil nails)

 

  • Party Wall easements – where a common wall supports more than one building

 

  • Wind farm easements

 

  • Right to park  a car  somewhere within the servient land (provided that the right is not so excessive as to exclude the servient owner and leave the owner without any use of his/her land for parking or anything else).

 

The above are a only a few examples of easements that I know of as registered/registrable in NZ)

 

“Hinde McMorland & Sim Land Law in New Zealand” is a comprehensive NZ Text on NZ Land Law and contains an extensive chapter on Easements.

 

  1. AS REFERRED TO IN GALE ON EASEMENTS (Published in London by Sweet & Maxwell – this is a detailed and authoritative Text, relating to easements, particularly in respect of “common law” easements )

 

  • Right to place over neighbouring land, clothes on a line
  • Right to mix muck on a neighbour’s land
  • Right to nail fruit trees on a neighbour’s wall
  • Right to use the chimney of a neighbour’s house for the passage of smoke

 

(there are numerous others referred to in this Text)

 

OTHER MATTERS RELATING TO EASEMENTS (NZ)

Variation

The terms and conditions of any registered easement can be varied by use of an Easement Instrument to vary the terms – this would need to be signed by all the owners of the land affected.

(N.B. the position of an easement cannot be varied – if the position of the easement is to be change then a surrender of the existing easement would need to be registered together with an easement instrument to create the new easement as defined on a new plan of easements. 

                         

Removal from title

  • Easements can be removed by registration of an easement instrument to surrender easements signed by all the affected owners Or if an easement is granted for a specified term then it is deemed to be extinguished from the time of expiry.
  • By application to LINZ under the provisions of Section 70 of the Land Transfer Act 1952 – requires statutory declarations to be prepared and submitted and service of notice and advertising by LINZ

 

 

 

 

Some other Acts that make provisions relating to Easements (NZ)

  1. The Reserves Act 1977 in respect of granting of easements over reserves
  2. The Resource Management Act 1991, making provision for Councils to impose conditional easements and making provision for easements for access strips
  3. Public Works Act 1981
  4. The Housing Act 1955
  5.  The Crown Forests Assets Act 1989 in respect of Public Access easements for access through Crown forests.
  6. The Land Act 1948.
  7. The Unit Titles Act 2010

 

  1. The Property Law Act 2007

 

a)     Section 297 and the 5th schedule imply provisions on respect of Rights of Way. When preparing easements instruments we need to consider whether or not any of these conflict with the LT Regs provisions and enter an appropriate clause in the easement instrument to cover this)(e.g. schedule 5 makes provision for equal contribution in respect of costs  whereas Schedule 4 of the LT Regs make provision for “reasonable contribution. & schedule 4 refers to with or without domestic animals (or if the servient land is farm land, farm animals, whereas schedule 5 of the PLA Act does not mention animals at all.

 

b)     Sections 326 to 321 re land locked land, including the provision to apply to the Court and for issue by the Court of an order for access to landlocked land.

 

A Court, on an application under Section 327, may make an order granting reasonable access to landlocked land; and for that purpose, specify in the order that any other piece of land (whether or not adjoining the landlocked land) must be vested in the owner of the landlocked land; or an easement over that piece of land must be granted for the benefit of the landlocked land.

 

This matter comes before the Court from time to time. Recent Court cases have made it very clear that land is not necessarily “landlocked” simply because the owner has no means of driving vehicles on to the property.

 

One of the most recent local cases in respect of this was Greenslade v Honeymoon Bay Holdings (2012) NZHC 3346

 

When the plaintiff purchased a section at Honeymoon Bay they knew that it did not have vehicular access and that the defendant was not willing to grant a right of way over the driveway of the defendant.

 

The section runs down to the beach; i.e. there is access by sea and the particular section does have pedestrian access from the driveway/right of way.

 

            When the plaintiff lodged their building consent it was contended by them that vehicle

            access was not essential to build & live on the property.

 

However the owner of the section (the plaintiff) subsequently applied to the Court for an order to grant right of way on the basis that the land is landlocked.

 

The Court concluded that the combination of sea and foot access was of a nature and quality that was reasonably necessary to enable the use of the section as a dwelling.

 

However it seems that this Court ruling is being appealed.

 

 

Utilising Trusts to Protect Assets - by Jon Tidswell

 

Many of you will be aware of the use of Family Trusts to protect assets, however, after nearly 30 years of working in this area I have noticed several common misconceptions about how Trusts operate:

  • Suitability

Family Trusts cost money to set up and maintain so there must be a valid benefit.  Unless you have business or relationship risk to your property (or a wish to preserve intergenerational wealth) you may not actually need a Family Trust.  They are not a “must-have” fashion accessory!

 

  • Fish-hooks – (Gifting)

Transfer of assets into a Family Trust typically leaves a debt owed back by the trust, which is an asset to you.

 

Until the debt is forgiven by you, this asset is still exposed.  Abolition of gift duty has encouraged “bulk” gifting of amounts greater than the traditional $27,000 per annum gift duty threshold, to reduce such debts.  However, any gifting, (even at the old “safe” $27,000 amount) has potential issues around either or both of:

 

(a)                a clawback of insolvent dispositions; and

(b)                availability of a residential rest home subsidy under current Law.

People with existing gifting programmes (or who are contemplating a Family Trust) need specific advice on these issues to understand recent law changes.

  • Alienation of Ownership

Once you transfer assets to a Family Trust, they are held by Trustees for the use and enjoyment of beneficiaries.  This may impact on your personal use or enjoyment of the assets.  Many people ignore this distinction and use Trust property as if it were still their own, which puts the Trust’s existence at risk and exposes that Trustee to liability.

 

  • Trustee Obligations

Becoming a trustee means taking on a raft of legal obligations to beneficiaries (and potentially to the IRD).  These obligations begin with a duty to understand the Trust Deed and the duties of a Trustee under it.  A Trustee has fiduciary obligations to beneficiaries, requiring diligence, honesty and no self-profit (except in limited circumstances).  Trustees of income-earning Trusts can remain liable for Trust tax and GST after resignation unless the IRD is notified of that resignation.

 

  • Summary

Family Trusts remain a useful tool for asset protection – however there are issues around suitability, potential fish-hooks with gifting, alienation of ownership, and assumption of liabilities that need careful consideration when you begin to think about the use of a Family Trust.