Problems with Existing Proprietary Leases

The proprietary lease used by most co-ops is a dinosaur dating to the years when Louis Lefkowitz was the New York State attorney general. The form has served us well, but more than 50 years of use have disclosed and highlighted many flaws, and despite the efforts of a few buildings to perform face-lifts on their leases, most still contain significant deficiencies that prevent co-ops from functioning at full efficiency. In addition, many leases contain odd or unique provisions imposed by sponsor attorneys reflecting some particular sponsor interest.

For example, the sublet policies of many buildings are not consistent with the provisions of their proprietary leases. Several buildings have incurred significant legal judgments because courts found their sublet fees to be unauthorized by corporate documents. Other buildings that wish to regulate sublets have found language in their proprietary leases that prohibits any regulation of sublets or requires an expensive "right of first refusal" as the only method to limit subletting.

Some proprietary leases even make it difficult to define the meaning of "subletting." As a result of some very poorly written proprietary leases, there are buildings that have found it impossible to regulate the use of apartments as "bed and breakfast" hotels. Many buildings fear that they do not have clear authority to impose legitimate security rules applicable to legitimate guests of their shareholders.

There have been numerous cases in which courts have overturned fees or charges against shareholders in arrears in the payment of their maintenance. It is often held that the typical proprietary lease provides only for the imposition of interest charges for late payments of maintenance. Similarly, co-ops that settle suits to recover large arrears when the shareholder ultimately agrees to pay what is properly owed have been denied recovery of the costs of litigation because of the language in their proprietary leases.

Other co-ops have been frustrated by the absence in their proprietary leases of provisions allowing the co-op to pass along to shareholders the cost of fines imposed on the co-op for garbage-sorting violations, or the costs incurred by the co-ops to "clean up" after tenant-shareholders. Similarly, many boards have looked in vain for authority to impose fines for violations of building house rules such as failure to properly sort recyclables or clean common areas set aside for recreational use by shareholders.

House rules are therefore enforced on an "all or nothing" basis: a violation of a house rule must be treated only as a "default" under the proprietary lease, which can result only in "termination" of the lease — inevitably leading to expensive litigation that can, but usually does not, result in the termination of the lease and eviction of the shareholder. Litigation over house rule violations usually forces the shareholder to follow the house rule in question, but at great cost to both the co-op and shareholder. The usual proprietary lease provides no other method for enforcement of the house rules. Many boards are fearful of adopting house rules that would benefit all shareholders, such as the requirement for all shareholders to have adequate liability and flood insurance, or to agree to arbitrate or mediate disputes between shareholders because of the difficulty of enforcing those rules.

Perhaps, even more significantly, many buildings have been unable to participate in valuable programs to save money for all shareholders and promote conservation through bulk purchases of commodities such as electricity, cable service, or high-speed internet service that would provide for each shareholder to be billed on the basis of consumption rather than by number of allocated shares. The obvious benefits of requiring payment to be computed as a function of use, are lost to most co-ops because of the structure of most existing proprietary leases.

The existing form of a proprietary lease also inadequately defines the respective obligations of the co-op to it's shareholders, the obligations of the shareholders to the co-op, and individual shareholders to other shareholders. The common erroneous expression "if it's in the wall it's the obligation of the co-op and if it's outside the wall it's the responsibility of the shareholder" is a reflection of the inadequate expression of the allocation of maintenance and repair responsibilities between the co-op and its shareholders contained in the typical proprietary lease.

The existing form is also totally inadequate in dealing with apartments that have additional "appurtenances": the definition of "terraces" or "roof spaces" is worse than useless and has led to much wasteful litigation. In addition, the existing form does not provide for "extras" such as garage spaces, storerooms, maids' rooms, and common area closets.

Unfortunately, there are many buildings that have ignored the inadequacies of their proprietary leases by adopting building practices such as transfer fees, "fines," late charges, and the like that are simply not authorized by their proprietary leases. These practices have led to serious money judgments against some co-ops and will continue to be an exposure for those buildings.

We have drafted the new form of proprietary lease to deal with all of the above issues as well as to reflect numerous changes in co-op law over the past 50 years (including the very recent revisions to the Uniform Commercial Code dealing with lien priorities).