What Is a Proprietary Lease? Definition & Example

Article Summary:

To live in co-op housing, one must purchase shares in the cooperative corporation that owns the real property. A proprietary lease governs the relationship and responsibilities shared by the co-op and shareholder.

Co-ops aren’t just for hippies. They are a great housing option for young people living in big cities or anyone looking for less expensive housing and a close community. Proprietary leases aren’t your average residential lease. They are what make the tenancy of a co-op shareholder legally binding. If you’ve ever considered living in a co-op, you should understand how they work and what a proprietary lease is.

What is a co-op?

In case you didn’t know, co-op is short for cooperative. It commonly refers to a housing cooperative, which is a jointly owned real property. A co-op is technically owned by a nonprofit cooperative corporation of which the inhabitants are joint owners. Participants in a co-op don’t own pieces of the property. Rather, they own shares in the corporation that owns the property.

Co-op communities

Co-ops are often friendly communities of people who enjoy collaborating and living around others. As they are typically affordable, co-ops can benefit people trying to save money living in large cities. Co-ops in the United States started in New York City. Today, more than half of the co-ops in the country are still in New York City.

Because it operates like a nonprofit corporation, a co-op is governed by a board of directors and house rules. Because all the inhabitants are shareholders, they also get a say in how to run the property. Co-op members vote on who will reside on the co-op’s board. The board is there to ensure the safety, welfare, and cooperation of all residents. It represents the best interests of the co-op corporation.

Co-ops vs. apartments and condos

Co-ops are not the same as apartments and condos. They are similar but operate differently. Buying an apartment is different than buying co-op shares. If you own shares in a co-op, you don’t own the real estate itself. You own shares in the company that owns the real estate. This gives you the right to occupy a residential unit. Co-ops can come in many forms, including houses, apartment buildings, and condo-like units.

Cooperative mortgages

Co-op mortgages are different than traditional mortgages. They are also called “share loans.” Shareholders can borrow money to purchase shares in the corporation and therefore occupy a part of the property.

Every co-op board may operate its application process differently, but the financing is usually similar across co-ops. If you want to buy a share in a co-op, you must get preapproved for a co-op mortgage, then find a property in your desired location, apply to join the co-op, then complete your co-op loan. Learn more about how to apply for a mortgage with this article from SuperMoney.

If you are trying to buy a home for the first time, check out these top mortgage lenders and 13 programs for first-time homebuyers.

Occupying a co-op

Typically, the larger the share, the larger the living area. For example, someone who purchases a more expensive share may live in a bigger apartment. Someone who purchases a smaller, less expensive share will live in a smaller apartment.

A co-op shareholder is not a statutory tenant. When people buy shares in a housing co-op, they sign proprietary leases that give them the right to occupy particular units in the building or complex. Let’s talk more about that.

What is a proprietary lease?

A proprietary lease gives a shareholder the right to occupy a dwelling unit owned by the cooperative corporation. Another term for proprietary lease is occupancy agreement. It is a legal document that validates and governs the relationship between the co-op and shareholder.

A proprietary lease acts as collateral for the cooperative mortgage, unlike traditional mortgages where the property itself is collateral.

How does a proprietary lease work?

Proprietary leases govern the rights of co-op shareholders and the bylaws they are obligated to follow in return. Every proprietary lease is different depending on the shareholder. The following items are common to most proprietary leases.

  1. Monthly maintenance fees
  2. Occupancy rights
  3. Maintenance responsibilities
  4. Right to terminate the lease
  5. Rules governing share sales
  6. Default terms
  7. Compliance with local, state, and federal laws

Responsibilities according to a proprietary lease agreement

A proprietary lease explains the relationship between shareholders and co-op corporations. Within this agreement, each party has responsibilities that it owes to the other.

Cooperative corporation responsibility

The co-op has two main responsibilities according to a proprietary lease: to maintain the co-op for the comfort and safety of shareholders and to enforce compliance with co-op house rules.

There are levels of responsibility for maintenance items that are outlined by the proprietary lease. The co-op is usually obligated to maintain and repair major systems on the property, including structural, mechanical, electrical, and plumbing. Cosmetic fixes may fall under the responsibility of the shareholder.

Co-ops function best when shareholders and board members comply with the rules. Co-op rules are defined in the proprietary lease. They exist for the welfare of all shareholders and the longevity of the co-op. The co-op is responsible for making sure that everyone follows the rules.

Co-op boards represent the corporation in fulfilling this responsibility. Board members receive complaints, remind shareholders of the rules, perform inspections, and report any irregularities. A co-op’s board can take action to evict shareholders who don’t pay fees or abide by the rules.

Shareholders responsibility

A shareholder who signs a proprietary lease agrees to uphold some responsibilities, too. The main responsibility of shareholders is to properly maintain their respective spaces and the common spaces of the co-op. This includes treating the space with respect, keeping it neat, and repairing any damages. Depending on the situation, a tenant may be responsible for some building maintenance charges.

Renovations and repairs can be somewhat of a gray area when it comes to whose responsibility they are. This work will often require an additional written agreement between the shareholder and co-op. A tenant should refer to the specifics of lease terms and discuss any renovations and repair concerns with the board.

All the shareholders agree to responsibly follow the co-op rules. A shareholder who violates any rules laid out in the proprietary lease may face disciplinary action. Every shareholder is responsible for equally participating in the community and voting on its rules.

Proprietary lease examples

We can exemplify how a proprietary lease works by discussing hypothetical violations of the terms. Here are a few examples of how a party may claim the rights granted by a proprietary lease.

Co-op violating a proprietary lease example

Most proprietary leases obligate a co-op to repair items that belong to the entire building. For example, if the private water lateral has a leak, and the co-op fails to repair it, it has defaulted on the lease terms. Shareholders can take legal action to make sure the co-op fixes the problem promptly.

Shareholder violating proprietary lease example

A shareholder signs a proprietary lease and agrees to abide by the co-op’s rules for renovations. The co-op’s bylaws dictate that shareholders must give reasonable notice to the co-op before making any renovations to their residential units.

Proprietary leases usually aren’t like ground leases, in which tenants have the freedom to make improvements during a lease. A tenant who chooses to install a new pedestal sink without giving notice could face punishment as severe as eviction.

Neighbors violating proprietary lease example

It is typical for a proprietary lease to list the right of quiet enjoyment for tenants. If you live in a co-op apartment building and your neighbor repeatedly hosts loud parties late into the night, you have the right to report this to the board. The board should then rectify the issue so that you may have peace at night.

Pro tip: If you are joining a co-op, review your proprietary lease carefully before signing. If there is any ambiguity, ask about clarifying the terms. It’s best to have all necessary clarifications put in writing before you sign anything.

An alternative to the co-op route

The market for real estate financing has generated many innovations over the years, co-op housing with its proprietary leases among them. If, despite the preceding information, this arrangement sounds like losing your individual autonomy to the will of a community, like one of those stereotypical made-for-TV-movie cults (or that “reality” show where people got voted off an island), you and the editor have something in common. Never fear, though. There remain many other financing innovations to explore.

One of those is shared equity. A shared equity agreement can help you fund a home purchase you’re unable to manage by normal means — because you can’t put together a down payment, for example. It’s also a way to pull equity out of home you already own.

FAQ

Who holds a proprietary lease?

A shareholder in a co-op holds a proprietary lease. It is an agreement between the co-op and the tenant, and both parties should keep a copy of the document.

Why is a co-op lease called a proprietary lease?

The word proprietary means “relating to an owner or ownership.” Typically, a lease is an agreement that gives a tenant the right to occupy a unit owned by someone else. With a co-op, there is ownership involved. Since the tenant owns a share in the corporation that owns the unit, the lease associated with a co-op is called a proprietary lease.

Who signs a proprietary lease?

A cooperative corporation and a shareholder sign a proprietary lease. Since the corporation is a legal entity, not an actual person, it is co-op board members, or other legal representatives of the co-op, who sign proprietary leases.

Why might a business owner opt to lease a building rather than purchase it?

Buying real estate can be expensive. A business owner may decide that spending profits on other operational improvements offers a better return than purchasing a building with the same money. If this is the case, leasing a building is a good option.

What is an indexed lease?

An indexed lease is a type of lease that increases the price of rent based upon a cost-of-living index.

Key takeaways

  • When you purchase shares in a cooperative corporation, you don’t own real estate. You own shares of the corporation, which give you the legal right to occupy a residential unit.
  • A proprietary lease is also called an occupancy agreement. It establishes a contractual relationship between a co-op and shareholder, outlining co-op bylaws and both parties’ responsibilities and rights.
  • Both the co-op and shareholders are responsible for keeping the property in good condition. It is the co-op’s responsibility to make major repairs and make sure tenants comply with bylaws. It is shareholders’ responsibility to take care of their respective spaces and pay any maintenance fees.

Learn more about living arrangements

Co-op housing is far from being the only complex legal arrangement affecting today’s living arrangements. For instance, if you buy a home, chances are good that you’ll find yourself dealing with a homeowners’ association (HOA) or deed restrictions. To learn more about these, check out our SuperMoney’s articles on how HOAs work, what HOA fees are, and what deed-restricted communities are.

View Article Sources
  1. About United States of America — Co-Operative Housing International
  2. Keys to Successful Co-op Housing — United States Department of Agriculture
  3. The Business Judgment Rule is Important for Housing Cooperatives — National Association of Housing Cooperatives
    This article, which starts on page 6, contains essential information for current and future co-op board members.
  4. Useful background articles from Rocket Mortgage, Total Mortgage Services, and other mortgage lenders, as well as from personal finance, real estate financing, and wealth-building sites — Various
  5. 13 Programs for First-Time Home Buyers — SuperMoney
  6. Best Mortgage Lenders for First-Time Homebuyers — SuperMoney
  7. Can You Buy an Apartment? — SuperMoney
  8. How to Apply for a Mortgage? A Guide for First-Time Homebuyers — SuperMoney
  9. What Are HOA Fees And What Do They Cover? — SuperMoney
  10. What Does HOA Stand For And How Do HOAs Work? — SuperMoney
  11. What is a Deed-Restricted Community? Everything You Need to Know — SuperMoney
  12. What Is a Co-Op Apartment? — SuperMoney
  13. What Is a Ground Lease? Pros & Cons Explained — SuperMoney