With housing inventory still lagging, sellers continue to have the upper hand.
What is a proprietary lease?
A proprietary lease, also referred to as an occupancy agreement, gives a shareholder in a housing cooperative the right to occupy a particular dwelling unit. Homebuyers who join a co-op are purchasing shares in a corporation rather than acquiring real estate. When homebuyer acquires their stake in a co-op, they are also granted a proprietary lease for their unit.
When someone buy a co-op, she’s not purchasing any real property. The cooperative corporation owns property — an apartment building or other residential property — and the individual co-op member owns a stake in the corporation. In place of a deed, co-op members are granted shares of stock and a proprietary lease or occupancy agreement.
A proprietary lease governs all aspects of the relationship between the co-op and each shareholder. It spells out the rights and privileges associated with a member’s residential unit, including
- Who may occupy a residential unit, and the right to sublet a unit
- Total monthly maintenance charges
- Rules governing the sale of the shares in the co-op
- A shareholder’s right to mortgage
- What constitutes a default by a shareholder
- Who is responsible for maintenance and repair of a unit
- The co-op’s right to terminate the lease
With a conventional mortgage, the property is collateral for the loan. With a cooperative mortgage or a share loan, the shares in the co-op corporation and the proprietary lease are the collateral. They are not as valuable to the lender because they can’t be sold or disposed of as easily as real estate.
Members belong to their co-op’s board of directors or vote for members of the board. At the same time, they are tenants of the corporation that owns the property, placing them in the unique legal position of being both landlords and tenants. A proprietary lease is considered to be a form of residential lease like any other. As a result, the relationship between the co-op and members is governed by the laws applicable to residential leases: landlord-tenant law.
Buying into a co-op does come with strings attached. Before signing a proprietary lease, prospective investors must sit before a co-op board to be vetted. Additionally, a certain financial threshold, usually including a minimum gross income, must be also achieved in addition to an expressed intent to occupy the units for a specific period of time.
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Proprietary lease example
A propriety lease governs who is responsible for fixing problems in a co-op building. If a pipe bursts inside a wall, it is generally the co-op’s responsibility to open the wall and fix the pipe, however it is not necessarily the co-op’s job to repair or replace the wall covering. The co-op will only return the wall to a paintable surface. If you have expensive wallpaper on that wall, it could be costly to replace.