A proprietary lease is an agreement that provides shareholders of a particular co-op the right to occupy specific apartments. Shareholders don’t own their units, so they must follow the terms of their lease to legally occupy their units.
Proprietary leases are a great choice for those who are looking for a new place to live that offers them some of the freedoms of homeownership without the financial burden of actually owning property. But, if you’re considering signing the dotted line on a proprietary lease, it’s crucial to understand how this type of lease is unique from others, and what kinds of rules and responsibilities you’ll need to adhere to.
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What’s a proprietary lease?
Sometimes called occupancy agreements, a proprietary lease is an agreement that provides shareholders of a particular co-op the right to occupy specific apartments.
They also outline other rights and responsibilities of both the shareholders and the co-op’s board of directors related to living in and managing the co-op space. Here are some of the rights and responsibilities that are covered in proprietary leases:
- Who can occupy a residential unit and the right to sublet a unit
- What total monthly maintenance charges are
- How the sale of the shares in the co-op work
- Who is responsible for the maintenance and repair of a unit
- The co-op’s right to end a proprietary lease
Proprietary leases are different from condominium ownership contracts because the shareholders don’t actually own their units. That’s why proprietary leases have to carefully lay out the legal terms of the agreement, including the processes all shareholders must follow for renovations, sublets, repairs and maintenance, and other specific terms of occupying a unit in a specific co-op.
How proprietary leases work
When you buy into a co-op, you’re granted a specific number of shares in the corporation that owns the real estate. Becoming a co-op shareholder and occupying a unit in a co-op is not the same as owning real estate. You do not own or co-own your unit—you own a stake in the co-op.
This purchase allows you to occupy a unit within the co-op for an indefinite amount of time if you adhere to all of the terms in your proprietary lease.
Your proprietary lease will cover how the co-op will function, including the overall maintenance of the co-op. You’ll also find details on these essential responsibilities:
- Monthly maintenance payments
- Monthly bills
- Methods for services and repairs
- Compliance with local, state, and federal laws
- Inspecting shareholders' apartments and tips on how to maintain them
Generally, shareholders are financially responsible for the upkeep and repair of their unit, but they have to follow regulations detailed in the agreement to do so.
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Pros and cons of proprietary leases
There are many pros and cons of living in a co-op under a proprietary lease. Let’s take a look at each:
Pros of proprietary leases
- Affordability: Proprietary leases require co-op occupants, or shareholders, to purchase a number of shares in the cooperative corporation that owns the building. This is often more affordable than typical tenancy agreements or homeownership.
- Less maintenance and more freedom: Co-op shareholders have more freedom in altering, maintaining, or repairing their unit the way they’d like to as long as they’re in accordance with their proprietary lease terms. Unlike homeownership, they don’t have to maintain a yard or units outside of their own. Unlike typically tenancy agreements, the shareholders can renovate and alter their space how they’d like to.
- Sense of community: Typical tenancy agreements are usually 12 months long and can be renewed or terminated after (and sometimes before) the lease is up. On the other hand, proprietary leases usually guarantee that a shareholder can occupy a unit in the co-op for an indefinite amount of time. This means shareholders can make lifelong friends with their neighbors and enjoy a sense of belonging without the hefty cost of homeownership.
Cons of proprietary leases
- Continuous fees: While co-op living is usually less expensive than renting or owning, shareholders are still responsible for maintaining their unit, any renovations they want to do, plus all of the maintenance fees associated with living in a co-op.
- Living restrictions: The amount of freedom granted to a shareholder in a co-op varies depending on which co-op they’re a shareholder of. Some co-ops have very restrictive rules about how shareholders occupy units, including renovations, noise levels, and more.
Proprietary leases in real life
Proprietary leases are complex and the exact rights and responsibilities can vary depending on which cooperative corporation you buy into. Nevertheless, here’s a quick example of how a proprietary lease works in real life.
Let’s say you’re a shareholder with stakes in a cooperative corporation that collectively owns an older apartment building in New York. Along with your shares, you’ve been granted the right to occupy a unit in this building and your relationship as such is outlined by a proprietary lease agreement.
On an extremely cold morning, you wake up to find out that a pipe in your bathroom has burst from freezing temperatures. Your proprietary lease dictates that it is the co-op’s responsibility to open your wall and fix the pipe—but it isn’t the co-op’s job to restore the wall to its original condition. So, while the co-op fixes your pipe, you’re financially responsible for replacing the tiling you installed in the bathroom a year ago.
The difference between a proprietary lease and co-op bylaws
While proprietary leases are focused on the contractual relationship between each shareholder and the co-op, the co-op bylaws are focused on the big picture of how the co-op is supposed to run and the residency rules of the co-op.
Co-op bylaws cover how the co-op is managed and governed on a broad scale. It details things like board member eligibility and elections, annual meetings, voting, executive committee rules, and house rules.
Co-op bylaws also grant the co-op board certain duties and powers on behalf of the co-op as a whole.
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Do co-ops usually renew proprietary leases?
Yes! Typically, your co-op board will extend your lease to keep the maturity between 30 and 50 years. Your lease maturity date refers to the date your lease expires. Co-op boards keep the lease maturity date 30-50 years in the future because maturity dates under this timeframe can cause problems with potential lenders.