What happens when a co-op’s proprietary lease expires?
Oct 12, 2023
If you’re a prospective co-op buyer, you’ve likely come across the term “proprietary lease” during your buying journey. You might be wondering what exactly it entails and why co-op boards seem so diligent in extending their expiration dates.
First, let’s demystify the term. A proprietary lease is a legal document that grants a shareholder (you, the co-op owner) the exclusive right to occupy a specific unit within the cooperative building. Unlike traditional homeownership, where you own both the dwelling and the land it sits on, co-op ownership is unique. In a co-op, you own shares in the cooperative corporation, and your proprietary lease gives you the right to reside in your unit.
Why Don’t Proprietary Leases Expire?
You might be puzzled about why proprietary leases, unlike regular leases, don’t have expiration dates. The reason is straightforward: co-op boards typically extend the expiration date of every shareholder’s proprietary lease well before it ever comes close to expiring. This proactive approach serves several crucial purposes:
Satisfying Financing Requirements
Most bank lenders are hesitant to finance co-op apartment purchases if the remaining term on the proprietary lease is shorter than the loan term. This is because they want to ensure that their loan is secured for a reasonable period. To meet the financing needs of both current shareholders and potential buyers, co-op boards strive to maintain a lease term of at least 30 years.
Creating Shareholder Stability
A stable co-op community benefits everyone. By extending proprietary leases well in advance, co-op boards help maintain stability, ensuring that long-term residents can continue to call the co-op home without unnecessary disruptions. Every shareholder shares the same, most updated version of the co-op’s proprietary lease. This is the case even if the shareholder’s original proprietary lease received at purchase is now outdated. The latest version of the co-op’s proprietary lease applies to every single shareholder. As a result, it is not possible for a co-op board to somehow single out a shareholder and punish them by having only their proprietary lease expire.
Why can’t co-op boards just extend the proprietary lease hundreds of years into the future?
Extending a co-op’s proprietary lease hundreds or even thousands of years into the future would be convenient and would also ensure that a co-op board won’t negligently forget to extend the lease; however, granting such a lengthy lease to a shareholder could be interpreted by the government as a transfer of ownership. If the government suspects that a transfer of ownership has in fact occurred, the co-op could be liable for paying NYC and New York State transfer taxes! This is precisely why co-op boards will always try to keep the minimum life of their proprietary leases at 30 years but won’t extend it too much longer than that.
While the concept of a proprietary lease may initially seem complex, it serves as a cornerstone of co-op living. Co-op boards take their role seriously in ensuring that shareholders have the peace of mind they need to secure financing, plan for the future, and enjoy the stability and community that co-op living offers. Rest assured, those expiration dates are just one less thing to keep you up at night
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Below is an excerpt from a sample co-op proprietary lease in New York City
PROPRIETARY LEASE, made as of December, 31 1981 by and between [COOPERATIVE
CORPORATION] with offices at [ADDRESS], New York, New York, hereinafter called the
Lessor, and [SHAREHOLDER NAME] residing at [ADDRESS] hereinafter called the
Lessee.
WHEREAS:
- The Lessor is the owner of the land and building erected thereon in the
Borough of Manhattan, City of New York, known by the street number
[ADDRESS] (the “Building“).
- The Lessee is the owner of [NUMBER] shares of the Lessor to which this Lease
is appurtenant and which have been allocated to apartment [NUMBER] in the
Building.
- The Lessor acquired the Building pursuant to an Offering Plan dated [DATE]
(the “Plan“).
Demised Premises Term
NOW THEREFORE, in consideration of the premises, the Lessor hereby leases to the
Lessee, and the Lessee hires from the Lessor, subject to the terms and conditions hereof
the above mentioned unit in the Building (hereinafter referred to as “the leased space“)
for a term from [DATE], until December 31, 2030, unless sooner terminated as
hereinafter provided. As used here, in “the leased space” designated by the above
stated number, means the area and rooms in the Building as partitioned on the date of
execution of this Lease together with their appurtenances and fixtures, and any closets,
gardens, terraces, or portions thereof outside of said partitioned rooms which, subject to
the provisions of Paragraph 7 hereof are or is allocated by the Board of Directors of the
Lessor (hereinafter called the “Directors“) to the exelusive use of the occupant of the
leased space. The leased Space of the penthouse apartments include the portions of the
roof adjacent thereto.
Rent (maintenance) How Fixed
- (a) The rent (sometimes called “maintenance”) payable by the Lessee for each
year, or portion of a year, during the term shall equal that proportion of the
Lessor’s cash requirements for such year, or portion of a year, which the number
of shares of the Lessor allocated to the apartment bears to the total number of
shares of the Lessor issued and outstanding on the date of the determination
of the total cash requirements of the Lessor. Such maintenance shall be payable
in equal monthly installments, in advance on the first day of each month, unless
the directors at the time of their determination of the cash requirements shall
otherwise direct. The Lessee shall also pay such additional rent as may be
provided for herein when due.