The Seven Virtues

The new shareholder's agreement and proprietary lease prepared by the Council of New York Cooperatives and Condominiums has numerous improvements over the proprietary leases currently used in New York State. Several of these have the potential for significant positive financial implications for the cooperative. These include:

1.Categorization of the cash requirements into two broad components — ownership expenses and operating expenses.

2.Abatement of only the portion of the maintenance charges attributable to operating expenses in the event the apartment becomes partly or wholly uninhabitable.

3. A requirement that all tenant-shareholders, including those whose maintenance charges were abated, pay any assessment imposed to cover shortfalls in maintenance caused by an abatement of carrying charges to some or all of the tenant-shareholders.

These three work in tandem. By splitting the cash requirements into two components the new lease provides for the continuation of that portion of the maintenance charges attributable to ownership, i.e., mortgage payments, real estate tax, capital improvements, corporate taxes, and similar expenses, even in the case of a partial or total "eviction" of one or more shareholders.

This is important. In a warranty of habitability case, for example, the courts would recognize the tenant-shareholder's obligation as an owner to continue to pay the ownership component of the maintenance charges and, if warranted, only abate a portion of the operating expense component of the maintenance charges. Also, in the case of a fire, or other catastrophe, this provision clarifies the tenant-shareholders' obligations to continue paying the portion of the maintenance charges required to continue the ownership of the property.

Finally, the third point clearly obligates all the tenant-shareholders to cover, by assessment, income shortfalls caused for any reason, including the abatement of their maintenance charges because they could not fully use their apartment. Taken together, these provisions help ensure that the cooperative will be able to collect sufficient funds to maintain the property.

4.Clarification of the right to impose sublet fees.

5.Clarification of the definitions of user charges and that user charges are paid in addition to maintenance charges. The rights of boards of housing cooperatives to impose sublet and other charges has been challenged in the courts. Because of the wording of the existing proprietary lease, in many cases the board was not authorized to impose a sublet fee or other charges. In at least one case, a cooperative was ordered to refund a sublet fee, which resulted in a six-figure refund to a former tenant-shareholder.

In order to avoid such catastrophes, the new lease specifically authorizes the board, or, in certain cases, the tenant-shareholders, to impose sublet and related fees as a condition of the board's consent. Similarly, the lease eliminates other potential problems by specifically authorizing the board to determine which services, facilities, or utilities provided by the cooperative are to be paid for by the user based on use and not as part of the cash requirements and maintenance charges.

6. Continuation of certain tenant-shareholder's obligation to pay maintenance charges, user charges, and additional rent under the lease until the cooperative sells the apartment, or leases it for its own account.

7. Continuation of the obligation to pay maintenance charges, user charges, and additional rent after the "voluntary surrender" of the new lease by a tenant-shareholder.

These last two changes affect the obligation of a tenant-shareholder to pay, as damages, maintenance charges, user charges, and additional rent after the lease has been terminated. The first involves a termination by the corporation because of a default, or, in certain cases, by a vote of the shareholders. The second concerns a voluntary surrender of a lease by a tenant-shareholder. While the new lease continues the existing practice, which allows a tenant-shareholder to surrender his or her lease and stock, the new lease clarifies the tenant-shareholder's obligation after the surrender.

In both situations, the new lease obligates the former tenant-shareholder to pay, as damages, the maintenance charges, additional rent, and user charges until the apartment is sold or rented by the cooperative. These changes will significantly reduce any loss that a cooperative might have suffered to the exent that the old lease was unclear about these issues.

All in all, the new CNYC lease provides significant financial protections to the cooperative.