In: Proprietary Lease
Interior repairs in cooperative or condominium apartments aren’t as cut and dry as in a rental property. Unlike a rental, where most repairs would fall onto the landlord, there is a clear delineation of responsibilities for a shareholder / unit owner and the building.
At your cooperative closing, if you are obtaining a mortgage to finance the purchase, you’ll notice that the managing agent hands over at least two original copies of a Recognition Agreement to the bank that is lending you the funds, and then an original is also kept by the building’s Property Manager. So, what is the Recognition Agreement and why do we need it?
In NYC Cooperative buildings (or in all locations, really) adding someone to a stock certificate may seem like something that should be easily approved, but it is often a lengthy process.
The Cooperative Board of Directors is charged with protecting the interests of all of the Shareholders in the buildings, so when someone is being attached to the shares of a particular apartment, it is their fiduciary responsibility to ensure that this person will be able to financially afford to pay for the monthly maintenance, along with all other debts in their lives.
Even if this person has been living with the Shareholder for a lengthy period of time, most Boards will consider this transaction similar to a new purchase of an apartment and will ask for detailed reports on the financial activity of the new person applying.
These processes can also be costly. There are costs for application processing, Board review and then ultimately, the closing of a new stock certificate and proprietary lease.
Sometimes a Board of Directors in a Cooperative can overstep their bounds. Whether it’s from a lack of knowledge of what they can or can’t do or just a lax outlook on adhering to the building’s documents, Boards need to keep their limits in mind when making changes.
Recently, someone posed the question to the Habitat Magazine (http://www.habitatmag.com) forums asking if the Board can change the terms of the Proprietary Lease, to allow for Shareholders to now be responsible for the upkeep and replacement of windows. This was, according to the poster, done without the approval of the Shareholders at large.
The Proprietary Lease usually calls for a supermajority of Shareholders (either 66.6% or 75%, depending on the documents) to approve any changes to the Proprietary Lease or Bylaws. If there wasn’t a special meeting for this purpose or if it was not included on the agenda of the Annual Meeting, then the Board most likely made this change illegally.
We always advise our Boards to follow the law with regards to handling building documents to ensure that the rules and policies set forth are enforceable to the end.
We see this all the time in property management; a resident refusing to give a copy of their apartment key to their landlord or to the building staff in the case of an emergency. In New York, it’s part of the law that the tenant should give a copy of their key to the landlord and in Proprietary Leases for Cooperatives, it notes that the Lessee (shareholder) shall give a copy of their key to the Lessor (Coop Board or representative).
A Shareholder in a recent correspondence noted to Management that the shares attributed to their unit were too many in the Schedule A of the Offering Plan. Apartments that were attributed garage spaces had an extra 50 shares built into their proprietary lease and stock certificates, but this is the one apartment that had the extra shares in the unit but no garage to attribute the shares to.
Roughly 30-years after the building went Cooperative, this was noticed by the Shareholder. At the time of the purchase of the original shares from the Sponsor, an attorney looking into the building’s Offering Plan and supporting documents would have picked up on this discrepancy with a bit of due diligence. The Shareholder, having paid maintenance for a period of 30 years was only now looking into the perceived extra maintenance that they have been paying. There is no way, now, to adjust the shares in the Schedule A as that would change the entire layout of shares within the Cooperative as a whole.
With a bit of due diligence and paying attention to the details while purchasing the apartment, this mistake could have been avoided. They would not have been able to change the Schedule A but they would have been able to step away from the purchase in the first place, before the financial damage was done.
Proprietary Lease expiration dates are often overlooked until the expiration date is creeping towards 30-years from the present time. Banks like to know that the loans they are giving out to Shareholders (and to the Cooperative as a whole) are not going to be deemed worthless by an expiring Proprietary Lease that would effectively cancel their collateral.
Updating and extending the Proprietary Lease expiration date is a painless exercise, but one that requires some planning. A special meeting of Shareholders or an Annual Meeting can satisfy the vote to extend, but it has to be noted on the agenda when either notice of meeting is sent and usually, a supermajority of Shareholders are required to approve the change since this is changing the core building documents. Extending it as far as 75 years from the present date will allow a Board to have quite a bit of breathing room and a long time to go until those banks pop up their heads again.
Should your Proprietary Lease be close to expiring (in the banks’ eyes, any way) they may ask for a letter from the Board or from the Managing Agent to place in writing that the Corporation intends to extend the Proprietary Lease as soon as possible.