Glossary of Property Terms
In all dealings in property, participants need to be familiar with a wide range of technical terms and jargon. All sectors of commerce have their own industry specific terminology; the property industry is no exception. Some of the most commonly used property terms are:
Sale and Purchase
The status of an agreement for sale and purchase which is subject to specified conditions to be satisfied to make it binding.
The process by which careful consideration of every aspect of a proposed asset purchase or lease is reviewed including in-depth financial, legal and physical investigation. Because the purchase or lease of an investment property can be complex, sale and purchase agreements and lease agreements are often conditional upon the completion of due diligence within a specified period to the satisfaction of the purchaser or prospective lessee.
The point at which all conditional clauses within a sale and purchase or lease agreement have been satisfied or dispensed and the transaction is contractually binding on both parties.
The party borrowing funds whose property assets are mortgaged as security in favour of the lender.
The lender of funds who takes mortgage security over the assets of the borrower.
The seller of the property who holds the relevant title.
One who holds title to, and conveys the rights to use and occupy a property under a lease agreement. Commonly termed a landlord.
One who possesses the right to use or occupy a property under a lease agreement. Commonly termed a tenant.
A lease whereby the tenant pays a gross rent and the lessor pays out of that the operating expenses incurred through ownership. In such a lease the lessor bears the risk that the expenses may increase over the period of the lease.
A lease where the rent paid is the net return to the lessor because in addition to the rental stipulated, the lessee (tenant) assumes payment of all property charges, such as certain maintenance charges, service charges and insurance etc. In such a lease the lessee bears the risk that expenses may increase over the period of the lease.
OPEX (Operating Expenses)
The ongoing, generally periodic, operating expenses or outgoings associated with the occupation of space over and above the base rent. Operating expenses generally consist of the likes of rates, insurance, air-conditioning, lighting, lifts, cleaning, security and servicing charges etc.
In a net lease, such expenses are charged on a proportionate basis to individual tenants according to either a proportionate share of the rent or space occupied.
The right to review rental under a lease. Commonly in occupational leases (buildings) this is a 2 to 3 year period, while in the case of ground leases 5, 7, or 21 years are normal.
A clause in a lease whereby the rent payable by the tenant can increase or remain static at review but not fall. There are two general forms of ratchet clauses, full or modified. A full ratchet stops the rental falling below the previously reviewed rental level while a modified ratchet stops the rent falling below the initial contracted rental.
Right of Renewal
A clause within a lease giving a lessee the right, or rights, to renew an existing lease for a specified term on specified conditions.
An arbitrator is appointed by each party to a dispute in an attempt to resolve differences, typically in rent reviews. In the event of continued non-agreement, the parties then respectively refer differences to a pre-appointed umpire who makes a binding award.
The transfer of the whole of the tenant's interest in a property to another, whereby the other person
becomes the immediate tenant to the landlord in place of the original. The tenant who assigns the lease is called the 'assignor', and the party to whom it is assigned is called the 'assignee'.
A ground lease is a specialist form of tenure in which the lessor (the fee simple owner of the land) grants occupancy of the underlying land to a lessee. The main feature that differentiates ground leases from conventional leases is that the lessee normally has the right to construct or upgrade buildings on the land. A common form of ground lease in New Zealand is the Glasgow lease. Distinguishing features of this form of lease include:
- Established for a fixed term, usually 21 years
- Rent reviews are usually perpetual rights of renewal to the lessee at the end of each term
- Occupation of the land can go on indefinitely, provided rental payments are met and the ground lease is renewed at the appropriate time
- If the lessee does not renew the lease, the rights of the lessee revert to the lessor including all the improvements to the land with no compensation paid to the lessee.
A separate lease granted by a lessee of the whole or part of a leasehold interest to a sub-lessee.
The length of the sub-lease must be less than the unexpired term of the lessee's own lease of the property.
A lease between a landlord and a tenant which gives overall contractual responsibility to one particular tenant (head lessee). A head lease usually relates to an entire, multi-tenanted, subleased building and is usually for a longer term than the sub-leases.
In situations where an owner grants an estate in property that is less than their own, eg a lease or licence, their remaining interest is termed a reversion because the full interest in the property will eventually revert back to them.
Step up Lease
A type of lease where the rental increases at pre determined periods, usually annually. The rental levels maybe predetermined or fixed according to a particular index or percentage increase.
A lease whereby all or part of the rental is derived as a percentage of turnover. This type of lease normally also incorporates a minimum or base rent and is generally restricted to retail premises.
Auckland District Law Society Lease
A standard form of lease drafted by the Auckland District Law Society. Regarded as a concise popular form. Widely used in the commercial office sector.
A standard form of lease drafted by the Building Owners and Managers Association (BOMA). Generally regarded as more onerous from a tenant's perspective.
Inducements made on behalf of a lessor as a means of attracting tenants to lease space. More prevalent in periods of depressed market conditions. Common incentives include rental holidays and lessor supplied fitout.
A lump sum payment obtained by a lessor or assignor from a new lessee for the right to occupy premises. Derived from the right to obtain the key to open the premises. More common in highly sought after retail locations where vacant premises rarely become available.
Property held as Freehold is often referred to as an estate in Fee Simple. It is the interest in land having the greatest rights of use and enjoyment allowed by law and the widest power of disposal or alienation. All other forms of tenure are created out of a freehold or fee simple.
An estate or interest in the land defined by a lease contract for a specific period and usually for the payment of rent. The lease transfers the rights of occupation of the property to the lessee who is often subject to covenants as to use, term and rental etc.
A hybrid form of multi-unit tenure in which each owner has an undivided share of the underlying freehold as tenants in common, as well as a long term (usually 999 years) registered leasehold estate of the particular unit occupied. More common in a residential context.
A unit title, under the Unit Titles Act 2010, provides individual ownership or freehold title in multi unit developments. The main unit, such as an apartment or office is known as the Principal Unit, while other associated units such as car parks are known as Accessory Units. There will also generally be areas of common ownership such as foyers, lifts and driveways etc, termed common property.
A right which a person has to use land belonging to another in a particular manner without the
right of possession of the land, or to take any part of the soil or its produce, or to prevent a landowner from using their land in a particular way. A common form of easement is the right of access over another's property (Right of Way).
An agreement or promise by deed by which one party pledges to another that something will be done or has been done, and relates generally to the relationship between vendor and purchaser or lessor and lessee. It is commonly used to control the quality and type of building or tenants within new developments.
An instrument or document which transfers property or a right in property from one person to another.
Distrain for Rent
The legal right of a landlord to enter premises and seize a tenant's personal property or business effects to the value of any rent due under any lease other than a residential tenancy.
A legal entity created under the Unit Titles Act 2010 consisting of all the unit owners within a unit-titled property and controlled, where there are more than three, by an elected committee.
The Body Corporate essentially has an overall management and administrative function.
Rights of access to a use of natural waterways, rivers, streams and coastlines etc.
Certificate of Title (Identifier)
The document of title to the land held under the Torrens System of land registration. It consists of deeds stating the fact and extent of the interest held by the Land Transfer Office and the other by the registered proprietor.
A caveat is a legal document which, when lodged in the Land Registry Office, gives the caveator the opportunity of protecting an existing right or of establishing an existing claim in property. The most common form of caveat is the caveat against dealings with the land concerned. If effect, while the caveat is in place, it forbids any dealings in the land from being registered.
A local authority permit issued to enable a property owner or occupier to carry out an activity on the property that is not permitted as of right under a local District Plan.
Those activities that are permitted as of right under a District Plan and for which no consent is required.
Those activities where a consent will be granted but may or may not be subject to conditions imposed by the consenting authority.
Those activities where consent may or may not be granted.
Those activities that are prohibited under a district plan and for which no consent can be granted.
Notification of a resource consent application involves the placement of a public notice in the newspaper, notification of people most likely to be affected by the activity, including adjoining owners, and a sign at or near the property to indicate what is proposed.
In general terms, an application for resource consent need not be notified if the activity to which it relates is a controlled activity and all affected parties provide written consent.
Discretionary activities need not be notified if they are expressly permitted as such by a district plan, or a district authority is satisfied any adverse effects will be minor and written consent is obtained from adversely affected parties.
Land Information Memorandum (LIM)
A report provided by a Local Territorial Authority on request. It provides details on any matters affecting the land including:
- Compliance with resource management issues such as use, zoning, designations and building consents.
- Details on utilities such as water, sewerage, stormwater and any possible hazards on the site.
- Any outstanding charges and arrears.
- Compliance with the Building Act.
Project Information Memorandum (PIM)
A Project Information Memorandum (PIM) can be obtained from a Local Territorial Authority and
serves to alert prospective builders and developers of issues relating to the location of buildings and
how the use of those buildings may affect services to them. A PIM is provided for under the Building
Act 1991 and includes all information or requirements that could affect the construction of a proposed building including:
- Location of services
- Permitted footpath crossing points
- Geological history
- History of flooding
- Other approvals require from the local authority.
Under the Building Act 2004 any new or existing buildings that contain safety mechanisms such as sprinkler systems, lifts or escalators must have a compliance schedule. The schedule details inspection, maintenance and reporting procedures.
Building Warrant of Fitness
An annual certificate that confirms the requirements of a compliance schedule have been met.
Code Compliance Certificate
A certificate issued when building work is finished, confirming that the work is finished, confirming that the building complies with the New Zealand Building Code.
A local authority permit issued to an owner or occupier undertaking building work to ensure all work compiles with relevant codes.
An agency is the relationship, which exists at law between two or more persons whereby one (the
agent) is authorised to act on behalf of the other (the principal) to do certain specified acts. A common form of agency occurs in the sale, purchase and leasing of real estate.
One agent is selected exclusively to list and market the property. The agent is responsible to the vendor and may advertise the property exclusively. Outside agents may or may not be invited to participate at the sole agent's discretion.
A listing that is shared among a number of agents.
One agency has control over a listing. Other agencies are invited to participate, generally at full fee, with the master agent receiving an overrider fee. The master agent co-ordinates enquiries and advertises the property and liaises with owner on a regular basis.
Generally a joint sole agency where two or three agents are employed to market a property on an exclusive basis. Both agents may advertise, other agents may or may not be invited to participate at the joint agent's discretion.
The rate of interest that reflects the opportunity cost of capital from similar investments of equivalent risk. It is applied to future cash flows to convert them into present values and is normally expressed as a nominal annual rate.
The capitalisation rate is applied to convert net annual income from a property investment into value. In effect it is the market derived price : earnings : (PE) ratio.
Also referred to as the 'All risks Yield', 'Initial Yield' or 'Initial Return'.
Net Present Value (NPV)
The value of all future cash outflows discounted to present day terms, including the initial investment outflow and all cash inflows, including the termination value. Often used to check whether an investment meets a required rate of return by discounting all cash flows at the investors required rate of return. A positive NPV indicates a worthwhile investment and a negative NPV the opposite.
Internal Rate of Return (IRR)
The discount rate, which will equate all future cash flows to the original cost of the investment.
In effect it is a measure of the expected average annual rate of return on the unrecovered amount of an investment and involves finding the rate that discounts the net present value of all cash flows to a sum of zero. In real estate analysis this is sometimes referred to as the 'equated yield'.
The future estimated monetary value of an investment at a future termination date. Sometimes called a 'reversionary value'.
Commonly refers to the effect of debt. Expressed as the ratio of debt to equity. Also referred to as leveraging. An investment is negatively geared when the cost of debt exceeds the return from the investment.
Nominal Interest Rate
The generally quoted annual percentage rate (APR) of interest, ignoring the effect of compounding at less than annual intervals.
Effective Interest Rate
An annualised interest rate that incorporates the effects of compounding at less than annual intervals. The formula for calculating an effective rate is as follows:
EFF = 1+ n -1 *100
Where: EFF = Effective Interest Rate
APR = Annual Percentage Rate
n = Number of Compounding Periods
This involves the allocation of regular payments over a specified number of periods, which, with compound interest, will provide a fund to the value of an expected capital or maintenance cost at a future period.