New York's Cooperative and Condominium Community
Bill Morris in Legal/Financial on March 16, 2023
As all architects know, God is in the details. As all co-op board members know, the devil resides there, too. And one often-overlooked detail that can bedevil a housing cooperative is the expiration date of its proprietary lease.
An alert Habitat reader explains on our Board Talk chat room: “Another looming issue facing co-op boards is the expiration of the proprietary lease. Check the first or second page of your lease. There should be a hard expiration date, which was required when the proprietary leases were first approved. If the expiration date is less than 30 years from today, new purchasers will find it increasingly difficult to obtain 30-year mortgages. Why? Because when the proprietary lease expires, the co-op corporation will cease to exist, and the shares in the corporation (i.e. the mortgage collateral) will have zero value.” Now comes the wry kicker: “Banks are reluctant to underwrite mortgages where the collateral can be worthless.”
“That’s correct,” says Harley Seligman, a senior vice president at National Cooperative Bank (NCB).
William D. McCracken, a partner at the law firm Ganfer Shore Leeds & Zauderer, adds: “It would be suicide to let the lease expire. You would unwind the corporation.”
McCracken says he regularly confronts this obscure detail when advising his co-op clients. “The last two proprietary lease amendments I’ve done, I advised the boards to extend their expiration date,” he says. “One of the buildings had an expiration date of 2048 — just 25 years from now. I usually advise boards to extend the date for something less than 100 years. Different lawyers might say different things.”
One thing all lawyers will agree on is that the vast majority of proprietary leases require a vote by shareholders — usually approval by a two-thirds supermajority — to make any amendment to the proprietary lease, including an extension of the lease’s expiration date.
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“It’s not silly,” says Leni Morrison Cummins, a member at the law firm Cozen O’Connor. “If a co-op board is considering an amendment to the lease and it’s going through the task of garnering support from shareholders, it’s prudent to extend the expiration date if it’s around 30 years away.”
There’s no hard-and-fast rule. “Any time I look at a proprietary lease and see an expiration date in the 21st century, I recommend extending it,” McCracken says. “Certainly if you’re going to amend your proprietary lease to, say, institute a flip tax, then you should extend the lease’s term while you’re at it.”
McCracken adds that this “routine” detail is usually caught by a competent lawyer, but there is an added back-up. Whenever a prospective buyer considers purchasing a co-op apartment, her lawyer and lender will perform due diligence in examining the financial health of the co-op. Checking the expiration date on the proprietary lease is — or should be — one of their duties.
“Our lawyers go through all the governing documents,” says NCB’s Seligman, “including the proprietary lease, the offering plan, the bylaws. Checking the expiration date on the proprietary lease is part of our closing process.”
“It’s one of those things you don’t think about until you have to do it,” McCracken says, adding that he has never seen a housing cooperative corporation dissolved because its proprietary lease was allowed to expire. “But,” he’s quick to add, “stranger things have happened.”
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