PROPRIETARY LEASE: Definition and how it works

proprietary lease

When you buy into a co-op, the property becomes the property of everyone who lives there. A proprietary lease is a legal document that grants you the right to occupy a specific unit. Before signing on the dotted line of your lease agreement, it’s critical that you understand the intricacies of the proprietary lease that governs your co-op. So, what is a proprietary lease in real estate and its example? Before you sign a lease, here’s what you should know.

What is a Proprietary Lease

A proprietary lease is an agreement that grants co-op shareholders the right to live in a specific apartment space. Proprietary leases, also known as occupancy agreements, define the rights and responsibilities of shareholders and the cooperative corporation’s board of directors.

How A Proprietary Lease Works

Most shareholders are granted specific rights, such as the ability to sublet a unit in a cooperative apartment building and what a typical proprietary lease document will include (such as validation of a shareholder’s total number of shares).

The proprietary lease details the cooperative’s essential functions, including how the corporation will maintain the building for the benefit of all those who live there. The lease includes the following inclusions:

  • Monthly Maintenance payments
  • Monthly bills.
  • Service and repair methods
  • Observance of local, state, and federal laws
  • Inspecting shareholders’ apartments and providing advice on how to keep them in good condition

The lease also specifies the roles and responsibilities of the shareholders. For example, it could cover repair and maintenance rules for a specific unit, such as painting, tile floors, light fixtures, and so on. It also covers the upkeep of building-owned items like windows and elevators.

Proprietary Lease Co-op

A proprietary lease is a signed contract between a co-op apartment owner and the co-op board of directors. In other words, the agreement governs the owner’s relationship with the cooperative. As a result, it governs the residency rules of co-op apartment owners. In the majority of our blog posts, we emphasize that the co-op apartment owner is only a “shareholder.” Shareholders receive two benefits:

  • A stock certificate indicating how many co-op shares they own
  • A lease allows each owner to occupy the apartment he “purchased” indefinitely.

This owner does not own his apartment directly, but only the co-op. The unit is not legally considered real property. The building is owned by this entity, also known as a “co-op” (the real estate itself). The shareholder is not considered a statutory tenant under NYC’s rent regulation laws. The proprietary lease, on the other hand, governs the relationship between the shareholder (or tenant) and the co-op. The lease also governs corporate business law in New York State. The law operates for the benefit of all shareholders. 

The distinction between a proprietary lease and co-op bylaws

The bylaws and the proprietary lease are both essential foundational documents. The condo or co-op offering plan includes both materials:

  • The co-op bylaws govern the organization and management of the co-op. The bylaws highlight election rules and provide indemnification for officers and directors. Finally, they delegate authority to the co-op on behalf of the shareholders.
  • The proprietary lease, on the other hand, focuses on the contractual relationship between each shareholder and the co-op. It establishes the owner’s and the cooperative’s rights and responsibilities.

Content of the proprietary lease for a co-op apartment

A proprietary lease allows the owner to live in the apartment he purchased. An owner has divulged. That proprietary entitles him to live in the unit.

The proprietary lease for a co-op apartment specifies how shareholders must pay their monthly maintenance fees.

The proprietary lease specifies how maintenance fees are to be paid by each shareholder (generally on the 1st day of each month). This agreement also states that all shareholders are liable for their pro-rata share of any special assessments imposed by the co-op.

The proprietary lease outlines the co-op corporation’s responsibilities.

The proprietary lease reminds each shareholder that it is the co-responsibility op’s to keep the building in good working order. This responsibility extends to common areas (sidewalks, gym, hallways, stairways, elevators, etc.) It also discusses what utilities the HOA provides, which are typically water and gas.

Owners have the right to inspect their accounting records.

The co-op provides certified financial reports to all shareholders on an annual basis. Furthermore, according to the lease, shareholders have the right to inspect the accounting books on any day they want with proper notice.

The lease is the same for all of the owners.

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

The proprietary lease protects the co-op from any liability.

The cooperative is not liable for any damage, loss, or expense caused by the shareholder’s failure to comply with the proprietary lease. The same rule applies to anyone visiting the apartment, whether a guest or a contractor.

According to the proprietary lease, breaking the house rules constitutes a default.

The house rules can be changed or amended by the co-op. Those house rules are given to the lease at the same time and are technically part of the lease. Shareholders must follow all house rules and ensure that their family, guests, employees, or sub-tenants do as well. As a result, a simple violation of a house rule constitutes a breach of the proprietary leases.

An Example of a Proprietary Lease in a Co-op

Let’s consider a hypothetical situation as an example in which a shareholder might use a co-op proprietary lease to assert their rights.

Assume your proprietary lease includes a clause granting the right to quiet enjoyment. In your case against a noisy neighbor, you could cite the language in your lease. Your lease could say, “The lessee shall not permit or suffer any unreasonable noise in the building that will interfere with the rights of other lessees.”

Proprietary Lease Real Estate

A proprietary lease in a co-op is not like any other type of real estate lease. While a condo or single-family home involves a claim to real estate via a title or a deed, co-op ownership entails purchasing shares of stock in a cooperative apartment corporation as well as a proprietary lease for the specific apartment. A co-op apartment owner is a shareholder in an apartment corporation rather than owning proprietary lease real estate.

Board of Directors

A co-op, like any other corporation, has a board of directors. The board is elected by the shareholders, who are the owners of apartments in the building in the case of a co-op. As a result, the board of directors will include apartment owners. The board functions similarly to a corporate board and will typically include a president, vice president, treasurer, and secretary. They will be in charge of the co-op corporation’s operations, finances, rule enforcement, and a variety of other duties.

Board Approval

One distinctive feature of a co-op is the restriction on who can buy and occupy an apartment owned by the corporation. While there are few restrictions on purchasing a condo and none on purchasing a single-family home, a potential buyer of a co-op must seek and obtain the board of directors’ consent to purchase a unit in the building.

Maintenance Fees

Real estate taxes are paid by the owner of a single-family residence. A condo owner must pay real estate taxes as well as monthly common charges. According to the law, proprietary lease co-op apartment owners do not pay real estate taxes because they own personal property in the form of shares of stock in the co-op corporation. The co-op apartment owner, on the other hand, will be required to pay a monthly maintenance charge, which is a fixed fee that can be increased by a board of directors resolution. This fee is deposited into the co-op account and can be used for anything from general maintenance to repairs or capital improvements.

Title Insurance

Purchasers of real estate generally also purchase title insurance. Because ownership of a co-op apartment is not technically ownership of the real estate, there is no need to purchase title insurance. A co-op purchaser, on the other hand, has the option of purchasing leasehold title insurance, which insures the potential owner’s interest created by the proprietary leases. Leasehold title insurance typically protects against previously unknown liens affecting the co-op apartment.

Proprietary Lease Don’t Mean You Own Real Estate

The co-op board is in charge of establishing policies and making decisions in the best interests of the co-op. These rules are then enforced through the use of a document known as a proprietary lease. Proprietary leases, also known as occupancy agreements, divide the rights and responsibilities of the shareholders and the board of directors of the cooperative corporation.

Membership in a co-op has a few drawbacks. It’s also important to understand that the lease gives the co-op management the right to evict you if you don’t pay maintenance fees or break a rule. Furthermore, when you invest in a co-op, you are not purchasing real estate.

Proprietary Lease Example

An example of a proprietary lease specifies who is responsible for resolving issues in a co-op building. If a pipe bursts inside a wall, it is generally the responsibility of the co-op to open the wall and repair the pipe. However, it is not always the responsibility of the co-op to repair or replace the wall covering. The co-op will only make the wall paintable again. If you have expensive wallpaper on that wall, replacing it could be costly. This is a good example of a proprietary lease.

Frequently Asked Questions

What is a proprietary lease NYC?

A proprietary lease for a co-op apartment is the name of the contract between an owner (aka shareholder) and a cooperative corporation or co-op. The majority of the apartments in New York City are cooperatives. Indeed, the lease is one of the documents you will find within the co-op’s offering plan.

What document is needed to occupy one of a cooperative's apartment units?

A Master Deed is a fundamental document that establishes the existence of and governs the use and maintenance of a condominium property. In a cooperative, there are rules that cover common issues such as garbage disposal, maintenance, noise, and conflict resolution.

What would terminate a shareholders proprietary lease?

Typically, such termination can occur when a shareholder violates an important aspect of the lease, such as failing to pay monthly maintenance or other cooperative rules. In recent years, courts have permitted cooperative corporations to use this authority to cancel leases and, in effect, evict apartment owners.

What is an assignment of proprietary lease?

The specific agreement creates a first lien on and pledge of the Co-op Shares; the appurtenant Lease securing a Co-op Loan means Assignment of Proprietary Lease.

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