What Is a Proprietary Lease for a Coop Apartment?
We’ll demystify the following topic in this video.
My name is Chris at Hauseit.
Hauseit is the largest Assisted FSBO and buyer agent commission rebate company in NYC, established
2014.
A proprietary lease is a binding lease agreement between a shareholder and a cooperative corporation
governing the relationship between the parties and the terms of the shareholder’s residency
in the building, and more specifically their apartment within the building.
Proprietary lease definition
The proprietary lease is a signed lease agreement between a co-op apartment owner and the board
of directors of a cooperative corporation which governs the relationship between the
two parties and the terms of the co-op apartment owner’s residency in the building.
Keep in mind that because the coop apartment owner is a shareholder with ownership in the
cooperative corporation, the entity that actually owns the building, the shareholder is not
considered a statutory tenant under NYC’s rent regulation laws.
Rather, the shareholder tenant’s relationship with the cooperative corporation is governed
by the proprietary lease as well as New York State business law pertaining to corporations
who operate for the benefit of their shareholders.
Remember that co-op apartments are not considered to be real property since the cooperative
corporation actually owns the building.
Shareholders receive a stock certificate noting how many co-op shares they own, as well as
a proprietary lease which enables them to occupy the apartment they “bought,” effectively
in perpetuity.
Difference between the proprietary lease vs co-op by-laws
The co-op’s bylaws dictate how the co-op is organized, managed, how elections are held,
indemnifies officers and directors and grants various powers to the co-op.
The proprietary lease on the other hand is more focused on the contractual relationship
between each shareholder and the cooperative corporation, and the rights and responsibilities
of each party.
Both the co-op bylaws as well as the proprietary lease are considered to be important foundational
documents and can usually be found in the original condo or co-op offering plan.
Important sections of the proprietary lease
A proprietary lease is important because it permits the shareholder to occupy the apartment
that he or she “bought.”
Without a proprietary lease, a shareholder only has shares in the cooperative corporation,
which doesn’t do the buyer any good if he or she can’t actually reside in the apartment.
The proprietary lease dictates how maintenance charges are levied
The proprietary lease will clarify how and when maintenance should be paid (i.e. typically
on the 1st of each month), and also confirms that shareholders are responsible for their
pro rata share of any co-op special assessments.
The responsibilities of the coop corporation are spelled out
The proprietary lease will typically state that the co-op is responsible for maintaining
the building in good condition, including all common areas such as sidewalks, courts,
hallways, cellars, stairways, elevators etc.
It will also specify what utilities are included, such as hot and cold water and heat.
Right of inspection of the corporation’s books by shareholders
The proprietary lease gives shareholders the right to inspect the “full and correct books
of account” during reasonable hours at the corporation’s main office.
The co-op corporation is typically responsible for providing an annual financial report certified
by an independent accountant as well.
Everyone has the same lease
The sample proprietary lease we’ve included below states that “each proprietary lease
shall be in the form of this lease, unless a variation … is authorized by at least
two-thirds of the lessor’s shares.”
In the event that a revised proprietary lease is approved by a majority vote, then all shareholders
will get the new lease.
The coop corporation is totally indemnified
As you might imagine from what little you know about co-ops, the coop corporation is
totally indemnified from “all liability, loss, damage and expense arising from injury
to person or property occasioned by the failure of the lessee to comply with any provision
hereof; or due wholly or in part to any act, default or omission of the lessee or of any
person dwelling or visiting in the apartment, or by the Lessor, its agents, servants or
contractors when acting as agent for the lessee as in this lease provided.”
Breaching the house rules is an act of default
The proprietary lease informs the shareholder that the co-op corporation can alter or amend
the house rules, and that the house rules are considered to be part of the proprietary
lease since it was given in conjunction with the proprietary lease.
Our sample proprietary lease states that “the lessee hereby covenants to comply with all
such house rules and see that they are faithfully observed by the family, guests, employees
and subtenants of the lessee.
Breach of a house rule shall be a default under this lease.”
Odor and Noises
Our sample proprietary lease states that “the lessee shall not permit unreasonable cooking
or other odors to escape into the building.
The lessee shall not permit or suffer any unreasonable noise or anything which will
interfere with the rights of other lessees or unreasonably annoy them or obstruct the
public halls or stairways.”
Pretty scary considering how subjective some of these terms are, and the lessee is considered
to be in default if the terms of the lease and house rules are not followed.
Shareholders automatically lose if a mechanic’s lien is filed
Per the sample proprietary lease we’ve included below, if a “mechanic’s lien against the
building building shall be filed purporting to be for labor or material furnished … to
or for the lessee … the lessee shall forthwith cause such lien to be discharged by payment,
bonding or otherwise; and if the lessee shall fail to do so within ten days after notice
from the lessor, then the lessor may cause such lien to be discharged by payment, bonding
or otherwise, without investigation as to the validity thereof or of any offsets or
defenses thereto, and shall have the right to collect, as additional rent, all amounts
so paid and all costs and expenses paid or incurred in connection therewith, including
reasonable attorney’s fees and disbursements, together with interest thereon from the time
or times of payment.”
This language is extremely scary and should be carefully read by anyone considering buying
a coop in NYC or anywhere else, because essentially you automatically lose if you have a dispute
with a contractor for any work done on your apartment.
For example, a terrible plumber comes by and doesn’t fix your in-unit boiler, but sends
you an arbitrary bill for $5,000 anyway for “labor.”
You dispute this, and the plumber files a mechanic’s lien.
The lien is technically on the entire building, and per the proprietary lease the cooperative
corporation will automatically pay it without investigating its merits, and bill you the
sum plus any additional costs.
Essentially, you automatically lose in any dispute with a contractor, and you’d have
to find some convoluted way to get that money back, if an appeal or a new lawsuit is even
possible.
Scary!
The co-op can force entry into your apartment
Not only are you required to share a key to every lock on your door, but if the building’s
staff can’t get in, then they are allowed to forcibly enter your apartment (i.e. break
in) at your expense.
The building only needs to provide you with “reasonable notice,” but otherwise they
are allowed to “visit, examine, or enter the apartment … at any reasonable hour of
the day upon notice, or at any time and without notice in case of emergency.”
The co-op can terminate your lease and repossess your apartment
The sample proprietary lease we’ve included below states that “the lessor shall have
the right to re-enter the apartment and to remove all persons and personal property therefrom,
either by summary dispossess proceedings, or by any suitable action or proceeding at
law or in equity, or by force or otherwise, and to repossess the apartment” in the event
that the shareholder violates the terms of the proprietary lease.
A few more of the more interesting conditions that will automatically cause of lease termination
are:
Lessee becoming bankrupt Unauthorized subletting or occupancy
Default in rent Default in other covenants
Lessee’s objectionable conduct
The last point is especially scary given the subjectivity of what constitutes “objectionable”
conduct.
Our sample proprietary lease states that if the board determines with a two-thirds vote
that the conduct of the lessee or a person dwelling or visiting the apartment is objectionable,
and this behavior persists after written notice, then the building can terminate the shareholder’s
lease.
Will the co-op renew my proprietary lease?
Yes, co-op boards will always remember to renew and extend the proprietary lease, typically
before it nears 30 years before expiration.
That’s because a proprietary lease that expires in under 30 years will cause problems
with many banks in regards to extending purchase financing.
As a result, it is the fiduciary duty of the co-op board to remember to extend the proprietary
lease and to always keep the expiration date more than 30 years in the future.
Remember that every shareholder has the same, most updated version of the proprietary lease,
meaning someone can’t be singled out.
Why can’t a co-op board extend a proprietary lease hundreds of years into the future?
Even though it might seem convenient for a co-op board to extend a proprietary lease
hundreds or even thousands of years into the future so they never have to remember to renew
it, they don’t do so because such a lengthy lease period might be interpreted by the tax
authorities as a transfer of ownership.
This isn’t what anyone wants as a transfer of ownership would require the payment of
NYS and NYC transfer taxes!
This is why co-op boards will always keep a proprietary lease updated with a term longer
than 30 years, but not much more than that.
So there you have it.
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My name is Chris at Hauseit, we'll see you in the next one.