With most types of housing arrangements, the terms are straightforward. When you purchase a house or a condo, you own the property outright, and when you rent your home, you pay a monthly fee in exchange for the right to use the space. But with a co-op, things are a little more complicated.
A co-op is similar to a condo in that you’re buying a share in a larger property. But with a condo, you actually hold title to a specific unit within the building. With a co-op, you’re buying a share in the entire building. This leads to an obvious problem: which unit will you live in? That’s where a proprietary lease comes in.
A proprietary lease is a document you sign when buying into a co-op. Among other things, it gives you the right to live in a specific unit.
So, what does this mean for you, the lessee? Here, we’ll go over the ins and outs of proprietary leases so you know what to expect before you sign.
What Is A Proprietary Lease?
A proprietary lease, sometimes called an occupancy agreement, gives a co-op shareholder the right to occupy a particular unit within the building. In addition, proprietary leases outline the rights and responsibilities of you, the shareholder, and the co-op’s board of directors.
For example, shareholders will have certain rights to renovate their own unit. But they will also have to follow certain procedures and perform regular maintenance and repairs. After all, one person’s leaky toilet is their downstairs neighbor’s ceiling nightmare.
Proprietary leases will also outline the terms for sublets, as well as the standard rules you’ll see in a standard lease or condo association rulebook. There will likely be restrictions on noise during certain hours, for instance.
[ Thinking about investing in real estate? Register to attend a FREE online real estate class and learn how to get started investing in real estate. ]
How Does A Proprietary Lease Work?
When you buy a share in a co-op, you’re not actually purchasing part of a building. What you’re buying is a share in a cooperative corporation. This corporation, in turn, owns an apartment building or complex. When you buy an ordinary house, you receive a deed. When you buy a share in a co-op, you literally receive shares of stock.
You also receive a proprietary lease. This lease gives you certain rights and responsibilities for the use and upkeep of your unit, and it defines the relationship between you and the cooperative corporation. Common lease terms include:
-
Who is occupying the unit
-
Whether or not the unit can be sublet
-
Monthly maintenance charges
-
Who is responsible for what types of repairs
-
Whether and how a shareholder can take out a mortgage
-
How the shareholder may sell their shares
-
What would constitute a default on the lease
-
Terms and conditions for the co-op to terminate the lease
A few of these things bear closer examination. First off, there’s the issue of a mortgage or collateral. In most cases, you’ll be able to take out a mortgage, just as you would for a real property. But with a home purchase, the deed serves as collateral. With a co-op mortgage, the shares in the cooperative corporation are the collateral. These shares are more challenging to sell than a traditional house, so lenders tend to charge higher interest rates for co-op mortgages.
It’s also important to understand how co-ops are managed. Along with your shares in the corporation, you have the right to vote for members of the board of directors. In fact, the members of the board will all be fellow shareholders. This puts you in a unique legal situation. On the one hand, you’re a tenant. On the other hand, as a company shareholder, you’re also the landlord. Regardless, the legal system governs co-ops and shareholders according to standard landlord-tenant law.
Keep in mind that there are specific financial requirements to joining a co-op. Most corporations will require a certain minimum income, as well as a minimum lease term before they’ll sell you any shares. You’ll also have to meet with at least some board members in person. On your end, you’ll want to do your due diligence, just as you would when buying a home or purchasing a stock.
How Do Bylaws Affect Co-ops?
Bylaws are rules that govern how the co-op operates, separate from the proprietary leases. A proprietary lease is essentially a landlord-tenant agreement between the shareholder and the corporation. On the other hand, the bylaws define the rules of the cooperative corporation itself.
Bylaws will govern how board members are elected, how often they’re elected, and who is eligible. They’ll outline organizational rules, such as how often the board must meet and how many members constitute a quorum. There will be rules for various subcommittees, outlining their specific authority and responsibilities to the board.
There may also be special bylaws governing board members. Typically, board members will be banned from granting themselves compensation from the corporation. There will also be rules regarding conflicts of interest. Basically, the bylaws ensure that the corporation functions in an effective, transparent manner.
What Is A Proprietary Lease Example?
So, how might you utilize a proprietary lease to your advantage?
Let’s say your upstairs neighbor has a leaky toilet that’s dripping through your ceiling. The proprietary lease will either require building maintenance to fix the toilet or require the upstairs tenant to have their toilet repaired. If you have issues getting the toilet fixed, you could cite the maintenance terms of the lease in your argument to the board.
Another good example is noise restrictions. Most bylaws will prohibit excessive noise during certain hours. If your neighbors are hosting a loud party until 2 in the morning, you can complain to the board.
Summary
A proprietary lease is an important document both for tenants and for cooperative corporations. For the corporation, it provides the same protections a standard lease provides to a traditional landlord. For the tenants and shareholders, it provides the peace of mind that your legal house is in order, with all your rights and responsibilities clearly outlined.
Ready to start taking advantage of the current opportunities in the real estate market?
Click the banner below to take a 90-minute online training class and get started learning how to invest in today’s real estate market!
