Understanding Your Proprietary Lease *

[Note that the document being discussed is a legal document with legal ramifications, which should be thoroughly reviewed with your attorney before signing. I am not an attorney, but as a licensed Real Estate Broker in the State of NY with over 25 years of experience with co-ops, including as a former Co-op Board President for many years, I am sharing this information to raise awareness of the importance of this document, as it spells out the mutual obligations of the Corporation and the Shareholder. Please feel free to consult your attorney to verify any or all representations or suggestions made here, or regarding any additional information you may want to know with respect to this document.]

When you bought your apartment, you may or may not recall your lawyer needing to examine the document generally known as a prospectus, or sometimes referred to as the "black book" or the "offering plan." This document is a multi-page affair, often running well over 100 pages, which is drafted by the sponsor (the entity that is converting or constructing the cooperative) to meet the legal and organizational requirements of the State Attorney General's office with regard to the creation of a cooperative. This document contains a wealth of important information, including the original offering plan, initial engineer's report, original terms of sale, detailed description of the property, the Proprietary Lease, and the By-Laws of the new corporation. If you are currently an owner of a cooperative apartment, your lawyer likely spent some time explaining this document to you before or at the closing. And this document should have remained in your possession (if you don't have it, note that the document often ends up in the hands of the bank that provides the financing, or your lawyer may still have it in your file).

The two most important sections of this document for an owner to be familiar with are the By-Laws and the Poprietary Lease. The By-Laws are the rules by which the cooperative operates, explaining how it is organized, how it is managed and run, who can be on its board of directors, and how elections are to be held. The By-Laws includes a sub-document known as House Rules which contains specific rules of conduct for residents of the cooperative. The Proprietary Lease is the signed agreement between the corporation and its shareholder(s), which clearly spells out the obligations of each side in the relationship. This last document is the one I will elaborate on further now.

The Proprietary Lease explains the function of the corporation in providing a structure in good condition and maintaining it for the benefit of all the shareholders of the corporation. Those functions include collecting monthly maintenance, paying bills, contracting for repairs and services, ensuring compliance with local, state, and federal laws, setting policy, and in general acting in the best interests of all shareholders. In performing its functions, the corporation may delegate tasks or hire others to do tasks for the corporation.

Shareholders' responsibilities include the repair and maintenance of their private spaces, and all finishes and fixtures therein. This usually includes paint, carpet, tiles, wallpaper, hardwood floors, sinks, toilets, tubs, showers, and shower bodies. Shareholders are also responsible for routine maintenance to Corporation property within their private space: for example, keeping windows clean, or periodically checking/changing air valves on steam radiators.

A great deal of confusion exists on the part of many shareholders as to their responsibilities because many have no previous experience as homeowners. In a rental situation, the landlord, who owns the building, is responsible for many interior issues, such as bathroom fixtures, hardwood floors, etc, because the landlord owns these things, and is providing them for use by the renter as part of the rental fee. In a cooperative, however, the shareholder is the owner of the interior space and all of its finishes and fixtures, and is therefore responsible for them.

What a shareholder is NOT, is a "statuary tenant," that is, a rental tenant covered under conventional rent regulation statutes and laws. Because the shareholder is (indirectly as a shareholder in the corporation) an owner! The shareholder's relationship with the corporation is governed by the Proprietary Lease as well as business law that regulates corporations who operate for the benefit of their shareholders. Many former renters are confused about their new status as owners, and have an expectation that the corporation will act, or needs to act, like previous landlords they have had. There is usually a key paragraph explaining your responsibilities as an owner*.

It is not, contrary to popular belief, the job of the corporation to inspect shareholders' apartments and give advice and education to shareholders about needed maintenance in their apartments. It is the shareholder's job to take responsibility for what he/she owns and develop their own maintenance plan, much like one would have to do if one bought a house. The faucet is leaking? Call the plumber. While many co-ops periodically inspect apartments to check for violations, unreported leaks, etc, it is up to the shareholder to, for example, periodically inspect his/her bathroom tile for a need to grout or caulk. If a shareholder neglects to do what is necessary, and, for example, causes damage to corporation property due to this neglect, the proprietary lease allows for all such charges to be billed back to the shareholder. If the shareholder causes damage to another shareholder's apartment due to negligence, he/she is also liable for the damage. (This is the reason most co-ops require shareholders to carry insurance on their apartments.)

While the Shareholder owns the interior space, changing that space is another matter. If a shareholder wants to make changes in his/her apartment, he/she may need to alter something structural, change a service hookup, reroute pipes. All of these kinds of changes could affect the main structure of the building as well as its legal status. Therefore the corporation has an interest in the matter to protect the interests of all shareholders from situations that may endanger health of occupants, welfare of the building itself, or the legal status of the building. This is the reason the Proprietary Lease clearly requires written permission from the corporation for any renovations or alterations. Shareholders often object to having to file an Alterations Agreement, especially if work done in the apartment is minor (like just painting a bedroom). But the truth is, the corporation is not clairvoyant, and does not know what the shareholder intends to do as part of the renovation until it gets the application in writing. The process also protects the building (and all the shareholders) by requiring licensed and insured contractors who will follow safe work practices, and by providing for a security deposit in case building property is damaged.

A word about the Super. The super is employed by the corporation for specific tasks for the corporation. This does not include doing work in shareholders' apartments. There are many routine maintenance items that the super can help you with BUT, if you contact the super, and he does something for you that falls in the category of shareholders' responsibilities, you must pay him for his services.

It's a really good idea, if you haven't already, to read your Proprietary Lease so that you understand all of your obligations as an owner.

*Note: The author is not an attorney, and this article is not meant to take the place of legal advice. If you are an owner, and have never reviewed the contents of your particular proprietary lease with an attorney, I highly recommend that you do do so, at your earliest opportunity, for a complete understanding of your obligations to and relationship with your cooperative corporation.