Your Proprietary Lease is a Dinosaur." So stated CNYC board president Marc Luxemburg, Esq. as he introduced a highly informative seminar on July 14, 1998. Proprietary leases cover a wide range of events and possibilities that arise in the day-to-day operation of a cooperative corporation. While the current standard form addresses many of these areas, it doesn't always cover them fully, nor does it take into account changes in the law or technological advances that have changed the way cooperatives operate.

Cooperatives in New York currently use one of three generations of proprietary leases; the last, and now the most common, of which dates from 1974. Mr. Luxemburg focused specifically on flaws found in this version of the standard proprietary lease, and suggested new clauses that could make proprietary leases more up-to-date and effective. For those whose buildings use the older versions, he noted that "the problems that I will point out will essentially be the same for you, only more severe and more glaring."

He stressed that there can't be a "one-size-fits-all" proprietary lease. "Each building has its own needs and its own way of doing things," he said. He noted that his rewritten clauses were simply suggestions, which he encouraged boards to review and modify with the help of their own attorneys to suit their buildings' needs and policies. He further acknowledged his own prejudice is always towards giving strength to the cooperative itself, rather than to individual owners, sponsors, banks and others associated with the corporation.

KEY CONCERNS

1. Occupancy. The occupancy clauses are found in paragraphs 14, 15 and 16 of the 1974 standard form. The use clause, paragraph 14, defines who is entitled to live in the apartment. But the concept of family has evolved, along with social attitudes and civil rights laws based on marital status. Furthermore, New York's "Roommate Law", which courts have applied to co-ops, prohibits limiting occupancy to people who have blood or marital relationships.

Mr. Luxemburg offered a carefully structured new version of Paragraph 14 that meets all the requirements of current law, and also gives great strength to the cooperative so that it can control the number of people in the apartment and can control attempts at subletting by roommates or family members.

Working at home is an issue that also arises in relation to the occupancy clauses. Does someone working at home with a computer and fax violate the use clause? Probably not, says Mr. Luxemburg. But when large deliveries, clients, messengers and heavy traffic begin coming, that may cross the line. "The tolerance limit is up to each individual co-op," he says.

2. Transfers and sales. These are covered in Paragraph 16 of the lease, which says shareholders cannot transfer their apartments without the board's consent, and that a board's consent can be withheld for any reason or no reason. However, Paragraph 16 doesn't specifically authorize boards to attach conditions to a transfer. These might include the need for a guaranty if the financials are weak, or the need for an occupancy agreement if parents are buying the unit for a child (or vice versa), or the need for an escrow account if you're unsure about the cash-flow, or conditions dealing with alterations. "The courts have already hurt co-ops that did not have such a clause in the sublet area, and it is possible that a court may say that there's no right to attach conditions in the transfer area," predicted Mr. Luxemburg.

The transfer clause is also vague regarding rights of possession and subsequent transfer to nonconsentual transferees – bankruptcy, lien or judgment creditors of the shareholder who have obtained the right of ownership of the apartment. The lease also does not spell out the right to charge a transfer fee. "The courts have clearly held that you can't charge a transfer fee unless it's in one of the organizational documents, preferably the proprietary lease," says Mr. Luxemburg.

3. Subletting. This clause, number 15, allows the board to reject a sublet for any reason or no reason – some of the time. Mr. Luxemburg's suggested new lease language addresses this by stating that, "There shall be no limitation on the right of the directors or lessees to grant or withhold consent, for any reason or for no reason, to a subletting."

Nor does the present lease clearly define what constitutes a sublet. Mr. Luxemburg suggest stating that, "Subletting shall include the occupancy of the apartment by any persons not authorized to occupy the apartment – whether or not any rent is paid by the occupants."

4. Late fees. Proprietary leases do not specifically authorize boards to charge a late fee. Thus, Mr. Luxemburg recommends changing Paragraph 12 to state that, "If the Lessee shall fail to pay any installment of rent when due, the Lessee shall be subject to a late fee to be determined by the Board of Directors." He also suggests language to deal with nonpayment

5. Terminations. What about in the case where the board needs to terminate a shareholder's lease because of a default? The present proprietary lease does not specifically authorize the board to sell that apartment, nor does it state that the defaulting shareholder's rights cease upon termination. Under the present lease, for example, he can continue voting even after his lease is terminated. "These points need to be clarified in a rewrite of the lease," says Mr. Luxemburg, noting that authorization to cut off defaulting shareholders' rights also requires an amendment of the co-op's certificate of incorporation.

6. Misconduct. The concept of misconduct covers a broad gamut of infractions other than nonpayment, such as subletting without consent, having pets without consent, playing the trumpet at 3 AM without consent, and other things shareholders can do to violate the lease. Mr. Luxemburg suggested clarifying language that defines such conduct as that which "repeatedly (A) violates or disregards the terms of this proprietary lease or the house rules established in accordance with the provisions of this lease, or (B) permits or tolerates a dangerous or disruptive person to enter or remain in the building or the apartment," as well as conduct that constitutes a felony. He also had insightful suggestions for ways that the cooperative should deal with different types of misconduct.

OTHER ISSUES OF IMPORTANCE
The proprietary lease also covers house rules (clause 13), repairs in the co-op (2) and inside apartments (18), alterations (21) and shareholder loans (17), each of which suffers in outdated standard-form leases. Under house rules, for example, a recent court decisions allows boards to levy fines, but Mr. Luxemburg cautioned that it is safer to call them "fees" or "administrative charges". Under alterations, the definition of "alteration" is not complete – cooperatives should modify this clause to prohibit a shareholder from altering any area that the co-op is responsible for maintaining and additional spaces outside the apartment, such as maids rooms and storage areas, without consent.

STAY TUNED FOR UPDATES
At CNYC's 18th Annual Cooperative Housing Conference on Sunday, November 15, 1998, Mr. Luxemburg will present a two-hour seminar on the Proprietary Lease. He will provide answers to many of the questions raised in this report and provide sample lease provisions designed to meet the current and future needs of New York cooperatives. For past articles on these issues, see the Newsletter Archive.