Beware This Wrinkle in the Proprietary Lease

The proprietary lease is a basic tool of governance in a co-op. But unless you’re a lawyer, you probably haven’t read yours from cover to cover. And that can cause problems when owners default.

In Federal Natl. Mtge. Assn. vs. Tenenbaum, the Federal National Mortgage Association (colloquially known as Fannie Mae) brought a holdover proceeding to evict Daniel Tenenbaum and his family from their unit in the Anchors Edge co-op in Freeport, Long Island. This was the result of a complex series of legal actions that had started when Tenenbaum defaulted on his mortgage loan.

“There was a non-judicial foreclosure sale of his stock and lease,” says attorney David Berkey, a partner at Gallet Dreyer & Berkey. The buyer, JP Morgan Chase, “acquired his interest in the stock and lease but didn’t actually have its own stock and lease issued.” JP Morgan Chase went to the co-op and asked for a new stock certificate and a new lease to be issued, and it then assigned the interest to Fannie Mae, who became the new lessee. Tenenbaum was given a 10-day notice to quit, because he was no longer the lessee. When the 10 days passed, Fannie Mae tried to have the Tenenbaums evicted.

This is where knowing the fine print in your proprietary lease becomes important. The Tenenbaums brought a motion to dismiss the eviction proceedings. Why? “Because the proprietary lease says that there’s no corporate ownership permitted,” says attorney William D. McCracken, partner at Ganfer Shore Leeds & Zauderer. Despite the fact that the co-op issued new shares and a new lease to Fannie Mae, the mortgage giant may still not be entitled to bring an eviction proceeding against the Tenenbaums because of this provision in the proprietary lease.

“What I would do if I was the co-op,” says McCracken, “is have [Fannie Mae] transfer the stock and lease to an individual” acting as a representative of the lender. “That way the individual can do this holdover proceeding, and you’ll get past that problem.”

The takeaway from this case: “Check your proprietary lease,” says McCracken. “If you have a lender coming and doing a foreclosure, make sure there is no prohibition on corporate ownership. And if there is, take the necessary steps to make sure that doesn’t trip them up in court.”