What is a proprietary lease?

The PropertyClub Team
Apr 5th 2020
The majority of homes available in New York City are co-ops, where the shareholder’s occupancy in the apartment is governed by a legal document called a proprietary lease. In this article, we will discuss this legal document in detail.

Co-ops and proprietary leases

Approximately 75% of apartments available for sale in New York City are in cooperative buildings (or “Co-ops”). Ownership in a co-op apartment is NOT the same as owning a condominium apartment or owning a single-family home. Specifically, when a buyer is purchasing a co-op apartment, they are not buying real property. Instead, they are buying shares in a corporation. Upon buying the shares, the buyer becomes a shareholder. In return, the corporation and shareholder enter into a document called a proprietary lease, where the shareholder becomes a tenant in the building. The larger the co-op apartment, the more shares the buyer owns in the cooperative building/corporation.  

When purchasing your apartment, your lawyer will advise you to examine the “offering plan” for the building. This document is typically over 100 pages and is drafted by the sponsor. The sponsor is the entity that is constructing the cooperative building or converting the building. This document contains information for the shareholders, including but not limited to the original offering plan, initial engineer’s report for the building, original terms of sale, legal description of the property, the Proprietary Lease, and the By-Laws for the corporation, etc. If you are a current shareholder in a cooperative apartment, without a doubt, your lawyer spent time reviewing this document before your closing. After closing, you should have obtained a copy for your records; if not, your bank and lawyer should have a copy. 

What is a Proprietary Lease?

The Proprietary Lease and the By-Laws are two areas of interest for shareholders in the offering plan. The first document, the By-Laws, are the governing rules of the cooperative building. Specifically, the By-laws detail how the property is organized, managed, who can be and run for its board of directors, how elections are run and held, etc. Typically, the By-laws include another document called the house rules, which are rules by which the residents of the cooperative building are expected to abide by. 

The second document, the Proprietary Lease, is the signed lease agreement between the corporation and each shareholder, which governs the relationship between the parties.  

Overall, a shareholder is not a statutory tenant under New York City rent regulation laws because shareholders are indirect owners and not a traditional tenant. As such, a shareholder’s occupancy and relationship with the cooperative are governed by the terms of the Proprietary Lease as well as New York State business law that regulates corporations who operate for the benefit of their shareholders. 

What are the Responsibilities of the Corporation According to the Proprietary Lease? 

The Proprietary Lease details the essential functions of the cooperative/corporation. Specifically, how the corporation will maintain the building in good conditions to benefit all the shareholders of the building. The proprietary lease governs the monthly maintenance payments, monthly bills, the manner in which the building will contract for services and repairs, how the building will comply with all local, state, and federal laws. Typically, the cooperative may hire other people or companies to do these tasks. 

The job of the cooperative building is to inspect shareholders’ apartments and give them advice and guidance on how to maintain their apartment. On the other hand, it is the shareholder’s responsibility to maintain their apartment. For example, if the shareholder has a leaky pipe, it is the responsibility of the shareholders to call a plumber. Overall many co-ops may inspect apartments to check for violations, leaks or to investigate complaints further. For example, a shareholder who resides below you may complain about a bathroom leak. As such the cooperative may inspect your apartment to see if your apartment is the cause of the leak. Upon inspection, the cooperative may discover that you need new grout or caulk in your bathroom. In this instance, the shareholder may instruct the Super to perform these repairs, and the shareholder will be billed back for them. Additionally, if the shareholder’s negligence has caused some damage to the apartment below, the shareholder is responsible. This is the reason why shareholders are required to carry insurance in their apartment.

What is the Shareholders’ Responsibility According to the Proprietary Lease?

Shareholders are responsible for repairs and maintenance of their apartment, which includes any finishes and fixtures, such as paint, wallpaper, hardwood floors, tubs, shower bodies, etc. Additionally, shareholders are responsible for routine maintenance of things that belong to the corporation, such as the windows and the radiators within the apartment. 

The fact that so many shareholders are former renters typically makes them confused about their responsibilities in their apartment. For example, in a rental, the landlord is the owner of the building and is responsible for most of, if not all, the repairs required inside of the apartment. However, in a cooperative apartment, the shareholder is the owner of the apartment; as such, any finishes and fixtures therein are their responsibility.

While it is true that the shareholder owns the interior space of the apartment, the rules are not so clear-cut when it comes to renovating that space. Specifically, if a shareholder wants to renovate or alter his or her residence, he or she may have to make structural changes that may affect the main structure of the building, as well as the legal status of the building, according to the New York City Department of Buildings. 

Therefore, the cooperative has to protect the interests of all its shareholders and the building in this situation. Thus, the proprietary lease will require written permission in the form of an Alteration Agreement from the cooperative for any renovations or alterations that the shareholder wants to make. While it may be annoying to some shareholders to file an Alteration Agreement for minor work such as painting a bedroom, these rules are designed to protect the cooperatives and its shareholders. Additionally, the process protects the cooperative and its shareholders by permitting only licensed and insured professionals to conduct work within the building. In this instance, it provides additional assurance that if something is damaged while work is performed in your apartment, the cooperative can seek compensation.

Most shareholders should review their Proprietary Lease in detail before purchasing their cooperative apartment. However, if you’ve already purchased your apartment, it’s still a good idea to review the document so that you understand your duties and responsibilities as a shareholder/owner.