What Is a Proprietary Lease for a co-op Apartment?
Go Back To Previous PageBy 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
words, 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.”- a stock certificate with the number of co-op shares they own
- a proprietary lease enables each owner to occupy the apartment he “bought,” in perpetuity.
Difference between the proprietary lease and co-op bylaws
- 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.
- 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) The proprietary lease for a co-op apartment dictates how shareholders pay their monthly maintenance charges.
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
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:- Owner becoming bankrupt
- Unauthorized subletting or occupancy
- Default in rent payments
- Default in other covenants
- Owner’s objectionable conduct
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 years. That’s because
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
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.
