The Nest

NestApple's Real Estate Blog

Featuring real estate articles and information to help real estate buyers and sellers. The Nest features writings from Georges Benoliel and other real estate professionals. Georges is the Co-Founder of NestApple and has been working as an active real estate investor for over a decade.

What Is a Proprietary Lease for a co-op Apartment?

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By definition, a proprietary lease for a coop apartment is the name of the contract between an owner (aka shareholder) and a cooperative corporation or co-op. Most of the units in New York City are coops. Indeed, the proprietary lease is one of the documents you will find within the co-op’s offering plan. In fact, condos do not have a Proprietary Lease this is why individuals buying a condo & condo owners have never heard of this.  This legal concept covers the specifics of the relationship between shareholders and the cooperative itself. It outlines the rules for renovating, subletting, maintenance, repairs, and more. This contract governs the relationship between the various parties. In other words, this agreement regulates the terms of the shareholder’s residency in the building. This contract designates their apartment in the building explicitly.

Definition of a proprietary lease for a co-op apartment

By definition, the proprietary lease is a signed contract between a co-op apartment owner and the board of directors of a co-op. In other Proprietary Lease for a Coop Apartmentwords, that agreement governs the relationship between the owner and the cooperative itself. Therefore, it regulates the rules of the co-op apartment owner’s residency. In most of our blog posts, we remind that the co-op apartment owner is only a “shareholder.”
Shareholders receive two things:
  1. a stock certificate with the number of co-op shares they own
  2. a proprietary lease enables each owner to occupy the apartment he “bought,” in perpetuity.
This owner does not own his very apartment but only has ownership of the co-op. Legally, the unit is not considered real property.
This entity or “co-op” owns the building (the rest estate itself). Under NYC’s rent regulation laws, the shareholder is not considered a statutory tenant. Instead, the proprietary lease governs the relationship between the shareholder (or tenant) and the co-op. The proprietary lease also governs the business law about corporations in New York State. The law operates for the benefit of all shareholders. 

Difference between the proprietary lease and co-op bylaws

Both the bylaws and the proprietary lease are pivotal foundational documents. The condo or co-op offering plan includes both materials:Proprietary Lease - park avenue apartment
  1. The co-op’s bylaws dictate the co-op organization and management. The bylaws highlight elections rules and indemnify officers and directors. Lastly, they also grant powers to the co-op on behalf of the shareholders.
  2. On the other hand, the proprietary lease focuses on the contractual relationship between each shareholder and the co-op. It defines rights and responsibilities for the owner as well as the cooperative.

Content of the proprietary lease for a co-op apartment

A proprietary lease permits the owner to occupy the apartment that he purchased. An owner has shares. That proprietary allows him to reside in the unit.

a) The proprietary lease for a co-op apartment dictates how shareholders pay their monthly maintenance charges.

The proprietary lease explains how and each shareholder is required to pay maintenance fees (generally the 1st day of each month). This agreement also confirms that all the shareholders are responsible for their pro-rata share of any special assessments decided by the co-op.

b) The proprietary lease spells out the responsibilities of the co-op corporation.

The proprietary lease reminds each shareholder that the co-op’s responsibility is to maintain the building in good condition. This responsibility includes common areas (sidewalks, gym, hallways, stairways, elevators, etc.) It also goes over what utilities the HOA include, generally water & gas.

c) Right of accounting inspection by owners

Annually, the co-op provides certified financial reports available to all shareholders. Besides, according to the proprietary lease, shareholders can look into the accounting books any day they want with proper notice.

d) Every owner has the same lease.

Each proprietary lease remains the same by definition. Only a majority of the two-thirds of the owners’ shares can update the proprietary lease. When that happens, all shareholders will get the new lease.

e) The proprietary lease indemnifies the co-op of any liability

The cooperative is not liable for any damage, loss, and expense o person or property resulting from the shareholder’s failure to comply with the proprietary lease. The same rule stands for anyone visiting the apartment, including a guest or contractor.

f) Breaching the house rules represents a default according to the proprietary lease.

The co-op can alter or amend the house rules. Those house rules are given simultaneously to the proprietary lease and are technically part of the proprietary lease. Shareholders need to comply with all the house rules and make sure that the family, guests, employees, or sub-tenant observe them. As a result, a simple house rule breach represents a default under the proprietary lease.

g) Smell and noise

The owner can cook but without generating unreasonable odors into the rest of the building. The owner can’t cause any excessive noise, either. Lastly, the owner cannot obstruct public hallways or stairways.

h) Shareholders automatically lose if somebody files a mechanic’s lien.

If a mechanic’s lien against the building gets filed. The owner needs to immediately take care of it. The owner can pay this lien quickly. If the owner fails to do it after notice from the co-op, the co-op may deal with it directly, without investigation. The cooperative has the right to collect all amounts paid. The co-op will also charge the owner attorney’s fees, disbursements, and interests. In short, the owner automatically loses in the case of a dispute with a contractor. For example, a lousy plumber comes by and doesn’t fix your in-unit boiler but sends you a bill for $10,000 anyway for “labor.” If you dispute this work, the plumber may file a mechanic’s lien. Technically, the claim is on the entire building. Therefore, the co-op will automatically pay without investigating. Then The co-op will bill the owner the amount plus any additional expenses. Essentially, shareholders lose in any dispute with a contractor. It is challenging to get that money back. The owner would have to appeal or start a  lawsuit.

i) The co-op always has access into your unit

Every owner is required to share a key with the co-op. If the building’s super can’t get in, they are allowed to a break-in at the owner’s expense. However, the co-op needs to provide you with reasonable notice and without notice in case of an emergency.

j) The co-op can kick you out and repossess your unit.

The co-op has the right to re-enter the apartment and to remove all persons and personal property from there if the shareholder violates the proprietary lease. Some conditions will automatically terminate the lease, such as:
  1. Owner becoming bankrupt
  2. Unauthorized subletting or occupancy
  3. Default in rent payments
  4. Default in other covenants
  5. Owner’s objectionable conduct
The board can opine an owner or a visitor’s attitude is objectionable. If this behavior persists after sending a notice, then the board can terminate the owner’s proprietary lease.

Will the co-op renew my proprietary lease?

Yes. Typically, when the lease’s expiration date reaches 25 or 30 years in the future, the co-op extends the term for many more yearsThat’s becauseProprietary Lease for a Coop Apartment a proprietary lease that expires in under 30 years may cause problems with potential lenders. As a result, the co-op board extends the lease to keep the maturity between 30 and 50 years.

   

Can’t co-op boards extend proprietary lease maturities to thousands of years?

Sadly no. Tax authorities could interpret such a long lease period as a transfer of ownership from the co-op to the owner. This interpretation becomes transactional with potential capital gains. This could trigger the payment of NYS and NYC transfer taxes. For this reason, co-op boards will keep a proprietary lease maturity updated with a maturity between 30 and 50 years.



Georges Benoliel Founder of NestApple - NestApple NYC cashback rebate

Georges Benoliel

Georges has been working in Wall Street for the last 16 years trading derivatives with hedge funds. He has been an active real estate investor for over a decade. Georges graduated from HEC Business School in Paris and holds a master in Finance from ESADE Barcelona.