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

July 21, 2019 by Georges Benoliel

A proprietary lease for a coop apartment is a contract between an owner (aka shareholder) and a cooperative corporation. 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. Condos do not have a Proprietary Lease, which 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. Therefore, it outlines the rules for renovating, subletting, maintenance, repairs, and more. In other words, 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. Also, this contract explicitly designates their apartment in the building.

Definition of a proprietary lease for a co-op apartment

By definition, a proprietary lease is a contract between a co-op apartment owner and the board of directors. A proprietary lease for a co-op apartment is a contract between an apartment owner and the cooperative’s board of directors. It establishes the rules for the owner’s residency. Most of our blog posts remind us that the co-op apartment owner is only a “shareholder.”

Proprietary lease coop

Shareholders receive two things:

a stock certificate with the number of co-op shares they own
a proprietary lease enables each owner to occupy the apartment he “bought” forever

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 contract governs the relationship between the shareholder and the co-op.

The proprietary lease also governs the business law of corporations in New York State. This 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 key foundational documents. The condo or co-op offering plan includes both materials: Proprietary Lease - park avenue apartment

Proprietary Lease - park avenue apartment

The co-op’s bylaws dictate the co-op organization and management. The bylaws highlight election rules and indemnify officers and directors. Lastly, they also grant powers to the co-op on behalf of the shareholders.
On the other hand, the contract 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

This document 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 each shareholder must pay maintenance fees (generally on the 1st day each month). This agreement also confirms that all the shareholders are responsible for their share of any special assessments.

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

This document 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. Therefore, 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 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 must comply with all the house rules and ensure 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 little odors in 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.

Suppose a mechanic’s lien against the building gets filed. The owner needs to take care of it immediately. The owner can pay this lien quickly. If the owner fails to do it 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 plumber comes by and doesn’t fix your in-unit boiler. However, he sends you a bill for $10,000 anyway for “labor.” The plumber may file a mechanic’s lien if you dispute this work. 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. Therefore, it is challenging to get that money back, and the owner must appeal or start a lawsuit.

i) The co-op always has access to 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 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.

If the shareholder violates the proprietary lease, the co-op has the right to enter the apartment and remove everything. Some conditions will automatically terminate the lease, such as:

Owner becoming bankrupt
Unauthorized subletting or occupancy
Default in rent payments
Default in other covenants
Owner’s offensive conduct

The board can opine an owner or a visitor’s attitude is offensive. The board can terminate the owner’s proprietary lease if this behavior persists after sending a notice.

Will the co-op renew my proprietary lease?

Yes. Typically, the board extends the lease when it reaches 25 or 30 years in the future, to keep the maturity between 30 and 50 years. This is because a proprietary lease that expires under 30 years may cause problems with potential lenders.

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, which 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.

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Written By: 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.

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