A familiar scenario arises regularly in cross lease properties. One owner proposes to demolish and rebuild, triggering the need for neighbour consent. Discussions may begin constructively, but over time positions can harden. What starts as a question of design or scope often becomes a dispute about whether consent can or should be withheld at all.

These situations are frequently sharpened by practical realities. Many cross lease dwellings are ageing, and in some cases approaching dereliction. The cost of remediation can far exceed the cost of rebuilding. What may initially be framed as preference becomes, in substance, a question of viability.

Against that backdrop, the Court of Appeal’s decision in Liow v Martelli is particularly timely. While the case turns on the interpretation of an alterations covenant, its broader significance lies in how the Court reframes the nature of cross lease ownership.

Cross leases originated as a practical response to planning constraints, enabling higher-density housing without formal subdivision. What began as a workaround has become a long-term form of tenure. What made sense in 1975 often does not in 2026. It is unrealistic to treat a cross lease as preserving a fixed moment in time. As the Court recognised, most cross leases run for 999 years. Over such a duration, buildings will age, decay, and require replacement. Expectations around design, functionality, density, and amenity will inevitably evolve.

The Court’s key insight is simple but significant: over the life of a cross lease, change is not exceptional, it is inevitable.

The Smallfield Rule

For many years, practitioners have relied on Smallfield v Brown as setting the standard for when consent to alterations could be unreasonably withheld. The commonly cited formulation requiring “substantial benefit” to the applicant and only “trifling detriment” to the neighbour has operated in practice as a significant constraint. If the neighbour suffers more than trifling detriment, consent may be refused.

That approach was reconsidered by Gault J in Martelli v Liow [2024] NZHC, who held that Smallfield should no longer be applied as a legal test on the basis that it was unduly restrictive. By effectively requiring minimal impact on neighbouring owners, it skewed the balance heavily in favour of the objector.

The Court of Appeal has now gone further. It has made clear that the Smallfield formulation is not the law. Importantly, the Court rejected not only the wording, but the underlying premise. A test that makes meaningful development contingent on negligible neighbour impact cannot sensibly operate over the lifespan of a 999-year lease.

The New Test

The Court’s reasoning reflects a shift in emphasis. Rather than treating alterations as exceptions to a largely fixed baseline, the Court recognises that change is inherent in cross lease ownership.

It follows that:

• cross lease arrangements cannot realistically preserve original building configurations indefinitely;
• owners must be able to respond to changing building standards, design expectations, and living requirements; and
• the law must accommodate a degree of evolution in how properties are used and developed.

In place of Smallfield, the Court returns to a more conventional question: would a reasonable lessor, having regard to all relevant interests in the cross lease context, withhold consent to alterations in terms of the lease?

While the impact on an individual owner remains relevant, it is only one factor. Greater emphasis is placed on weighing the collective interests of the parties, undertaking an objective assessment of the proposed works, and recognising the shared nature of cross lease ownership.

Whether consent is reasonably withheld will remain a fact-specific inquiry. Guidance from the Court indicates that a reasonable lessor would:

• have regard to the interests of all owners;
• seek to maintain good relations on an equal footing;
• recognise that, over a long-term lease, alterations and rebuilds are inevitable, and that a degree of “give and take, live and let live” is required;
• respect the rights and obligations in the cross lease documentation;
• expect works to avoid unnecessary detriment; and
• expect constructive engagement between parties.

One issue not directly addressed by the Court, but likely to become increasingly important in practice, is how the location of proposed works within the cross lease site affects the reasonableness analysis. In particular, there is a meaningful distinction between extensions undertaken wholly within an owner’s leased or exclusive use area and those that encroach into common property. Where works are confined entirely within a leased or an exclusive use area, and do not materially affect the other owner’s amenity or the integrity of the overall scheme, it will generally be more difficult to justify withholding consent. By contrast, where proposals extend outside leased areas or exclusive areas into common areas or interfere with shared aspects of the development, such as access, services, or site configuration, a refusal is more readily capable of being reasonable. This is not a rigid rule, but rather a reflection of the broader Liow framework: the question is always whether, in the circumstances, a reasonable co-owner could properly withhold consent having regard to the effect of the proposal on the cross lease arrangement.

Conclusion

The decision does not eliminate the potential for dispute. Cross leases will likely continue to generate friction, particularly as redevelopment pressures increase.

What it does do is remove an artificial constraint on development created by rigid thresholds. It shifts the focus toward a more practical, fact-specific assessment, recognising that both the proposing owner and the neighbour have legitimate interests.  At the same time, the underlying mechanics of cross lease titles remain unchanged. The risk of creating or perpetuating a defective title will continue to influence how parties approach proposed alterations, particularly given its implications for value, finance, and marketability. 

For property owners, the key takeaway is this: consent cannot be withheld simply because a proposal has some impact, or even because it raises concerns about title irregularity. Those matters remain relevant, but they must be weighed as part of a broader assessment of reasonableness in the particular circumstances.

In that sense, Liow v Martelli marks a shift to a more realistic framework, one that better reflects the long-term, shared nature of cross lease ownership, while leaving space for further development as these tensions play out in practice.