What Is a Proprietary Lease for a Co-op Apartment? - YouTube

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.