A New Lease on Life? Overhauling the Proprietary Lease

A New Lease on Life?

One of the main documents governing the majority of New York City's co-op buildings is the antithesis of the well-known Oldsmobile ad: it is your father's proprietary lease, and many of its parts are not exactly of-the-minute. Sponsors of most New York co-op buildings modeled their proprietary leases on a document that dates back to the 1970s, and although the detailed provisions of the lease vary from one co-op to another, on the whole, they are rather uniform - in some respects, according to many in the industry, uniformly in need of an update.

This leaves co-op boards with two choices, says Marc Luxemburg, president of the Council of New York Cooperatives and Condominiums (CNYC), summing them up by analogy. "You either keep repairing the car and getting new parts, or get a new car," he says.

Most real estate attorneys agree that the current lease is antiquated, but there is debate as to whether it's best to go forward making repairs (or amendments) as needed, or to junk the old document and begin anew.

New Lease or Not New Lease"¦

Luxemburg is the co-drafter of a modernized proprietary lease that was officially adopted by the CNYC this summer. "On a drafting level, there isn't a clause in the old lease that couldn't stand some improvement," he says. "But it's only about 20 to 25 percent of the old lease that is in need of drastic revision."

Other industry pros beg to differ. Marcie Murray, a partner at Manhattan law firm Deutsch Tane Waterman & Wurtzel, opposes the adoption of a new lease. " I don't view its creation as a major improvement over the existing lease, with which cooperative attorneys are so familiar," says Murray. "Each cooperative is entitled to a lease tailored to its situation. Many cooperatives are now amending - or have already amended - certain lease provisions they've found most in need, and have a good working document. I have not yet had a client who is willing to pay for the detailed review of the "˜new' form of lease (as compared to the standard form), without which no responsible attorney could recommend its adoption."

Because the new proprietary lease would have to be proposed to every shareholder, reviewed word-for-word, and in most cases voted into effect by a 75 percent majority in every co-op in the city, Murray points out that it would require an enormous expenditure of legal time and adds, "I don't see that it is imperative to incur such expense."

In CNYC Vice President Arthur Weinstein's view, however, the proprietary leases of many co-ops from the 1970s are coming to the end of their thirty-year terms, making it an opportune time to adopt a new document.

"Any amendments to the proprietary lease - including an extension of the lease term - would require a vote of the "˜super-majority' of a co-op's shareholders," says Weinstein, a member of the triumvirate responsible for drafting the new lease, along with Luxemburg and Council Chairman Stuart Saft. "You have to go to your shareholders and propose to amend it anyway, so why not bring it into the 21st century and clean up [its] ambiguities?"

Some of these ambiguities are major hotbeds of litigious disputes between a building and its shareholders; particularly regarding the definition of what constitutes legal occupancy in a unit and - in exceptional situations - determining who is responsible for what repairs. When legal action is necessary, these issues are compounded by a third ambiguous clause, perhaps the one in most dire need of clarification. Whose responsibility it is to pay the attorney fees incurred on a negligent shareholder's behalf?

When Ambiguity Breeds Hostility

By literal interpretation, people who sign up to live in a co-op are generally interested in "cooperative" living. For this reason, it is often the case that any seemingly ambiguous lease terms are discussed amicably between the shareholder and the corporation, with a handshake and a fair-is-fair attitude. Shareholders do not generally scrutinize the lease to affirm a co-op's authority in the face of reasonable demands. Many co-ops charge tenants late fees and sublet fees, for example, despite the fact that there is no such mandate in the proprietary lease. Day-to-day issues of policy and conduct are handled in the corporation's bylaws and house rules.

"Many shareholders take the attitude that certain expenses are incurred, and [they're] going to pay for it one way or another," says Murray. "They won't protest what they believe is fair."

But when disputes do arise, the lease clause entitled "Reimbursement of Lessor's Expenses," which requires tenants to reimburse the corporation for any legal fees incurred on their behalf, does not make clear at which stage of proceedings this responsibility begins. If a tenant is behind on maintenance payments, the co-op might hire an attorney to write a demand letter and/or send out a default notice. If the case is never brought to court, the co-op might get stuck with the lawyer's bill. In some cases, the courts have ruled that the standard lease only authorizes the tenant to pay for legal fees incurred by a case that has been litigated successfully in court.

John LaGumina, a partner at Quinn & LaGumina, LLP, in Purchase, N.Y., sees these rulings as mistakenly narrow.

"It's my feeling that the drafters of this provision simply omitted to include that [the tenant] would cover attorney fees incurred in the initial steps, prior to litigation," says LaGumina. "Otherwise, when someone is in default, you'd be better off to immediately bring [the case] into court. This would foster a more hostile and adversarial agreement, which is not the intention behind cooperative living."

Howard Schechter, a partner at Manhattan-based Schechter & Brucker, PC, concurs. Just based on the malleability of the repairs provision alone, it would be an abuse of the system if corporation defaulted to lawsuits every time a disagreement arose. "The main issue is avoiding disputes," he says.

Faulty Repairs Clause

The standard lease states in general terms that the shareholder is responsible for everything inside a shareholder's apartment, and the corporation is responsible for everything outside the apartment. "But there are both some exceptions to that rule and some gray areas," says Schechter.

The biggest exception, Schechter says, is with electrical wiring. Though the shareholder is technically responsible for the electrical wires behind the wall of their apartment, for safety and logistical reasons, the building handles these repairs.

Another exception occurs in the event of a natural disaster, in which case a co-op is required to restore the apartment, excluding any installations or alterations the shareholder has made. There is some question about the extent to which shareholders with completely renovated apartments should receive assistance, because theoretically, only the original fixtures are insured.

In the event that the building needs to knock down a wall or otherwise damage a shareholder's apartment in order to repair wiring or pipes, they will also generally agree only to restore an apartment back to its original condition. If they break down a wall, they will put it back up, but if it was lined, for example, with diamond-encrusted wallpaper, this is usually considered the shareholder's loss. However, such terms are often vague. "In revising the lease, it's desirable to make that policy explicit," says Schechter.

Other gray areas of the repairs provision are layered beneath a shareholder's feet. "When the lease says the floors are the responsibility of a shareholder, how far down in that structure does the shareholder's responsibility go?" asks Schechter. "Just the finished flooring, or the sub-flooring, too? What about the support elements?"

Generally, says Schechter, more important than the answer to these questions is the clear and consistent application of it. "Sooner or later repairs are required in most apartments," he says, pointing out that people will either pay as a cooperative or as individuals, so they break relatively even in the end, as long as the rules are fixed.

Does "˜And' Mean "˜With'?

The occupancy clause of the lease states that the shareholder and members of the immediate family are the only legal tenants of a co-op apartment. (Same-sex couples and unmarried heterosexual couples are protected under the New York Roommate Law.) For the nuclear family raising two school-age children, this works out simply enough. But what happens years later, when the shareholder decides to relocate to Paris but hang onto the apartment, enticing one of the now-grown children to return to the nest?

In this scenario, the meaning of the word "˜and' is the difference between a very lucky child and an illegal subtenant. "The courts have read that conjunction as very important," says Murray. And, over the years, they have also read it differently.

"One said that "˜and' means "˜or' and another court said that "˜and' does not mean "˜or,'" says Weinstein. More recently, courts have been ruling consistently in favor of the latter. A shareholder's children can only reside in the apartment when the shareholder is in residence. Otherwise, they're right alongside the rest of the city's apartment seekers, holding a broker's check in hand, in line to tour a tenth-floor walkup. In order to terminate the "and/or" debate, drafters of the CNYC's updated lease sought to write an occupancy clause with unbending definitions.

The Lease of the New Millennium

"We rewrote the occupancy clause so that it's very clear that "˜and' means "˜with,'" says Weinstein. "We didn't reference a single court case, but we wrote it with a knowledge of that history."

Other major points of the new lease include a more properly defined flip tax and sublet fee; a mandatory late fee for maintenance payments; a more expansive definition of the shareholder's physical property, including terraces, roof decks, and parking spaces; and a provision requiring shareholders to take out homeowners insurance. When the shareholder does not comply with these or any terms of the lease, it is made exceedingly clear that they are responsible for any legal fees incurred, including initial proceedings.

One of the more conceptual provisions is the right of the co-op to pass charges onto the shareholder on the basis of use, rather than exclusively on a per share basis. This would allow the co-op to purchase electricity or cable in bulk, then bill for services consumed, rather than charging shareholders a set fee by number of shares. This lease also gives the co-op authority to pass on the costs of violations incurred by the shareholder, like in the event that they don't properly sort their garbage and recycling.

Another conceptual revision was made with regard to objectionable conduct. "Existing leases have a two-notice default system," says Luxemburg. "You send someone a notice that they're doing something wrong, and then the second notice is a termination notice saying "˜you didn't cure it.'"

The tenant generally has a window of about 30 days to change their behavior. Luxemburg explains that while this system can be effective when the violation is, for example, subletting without consent, it fails to address offenses that might be abstained from for a requisite period and then resumed.

"What if you're allowing your dog to poop in the hallway? You get a notice, so the dog doesn't poop in the hallway for 30 days," says Luxemburg. "But what if the dog poops on the 31st day? The two-notice system doesn't know how to deal with that."

In drafting the new lease, the limitations of this system were accounted for, and under its revised terms, the co-op board is granted authority to charge fines in scenarios where tenants can take advantage of the loopholes in the two-notice system. Further, the concept of "objectionable conduct" was altered, so that in the event that a tenant is, for example, convicted for murdering a neighbor, the co-op board is not put in a position to send out a warning notice stating that this was, indeed, a conduct violation.

So"¦will this new proprietary lease be adopted? Some buildings are embarking on this process of doing so, but it will take at least two years to educate their shareholders on the terms of it, and to prepare them for a vote. Luxemburg has been witnessing what he calls a "strong inertia factor" among these shareholders, the majority of whom would just as soon not tack such heady matters onto the end of a day. Perhaps it will take an ill-mannered dog with a fondness for their doormat on the 31st of every month to propel more immediate or drastic action. Or, perhaps the longevity of the document will be increasingly seen as a testament to its sound structure. As old as the lease may be, it's nonetheless too soon to tell.

Jessica O'Brien is a freelance writer based in New York.

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