THE OCCUPANCY AGREEMENT AND PROPRIETARY LEASE
The Occupancy Agreement has been in effect in your Cooperative for 30 to 40 years. This is a document that was written in the 1950s and has been effective along with the underlying Certificate of Incorporation and By-Laws for the Cooperative.
I. Why Change or Amend It?
The proponents against change will say:
A. This will require an amendment of the Certificate of Incorporation.
B. It will require an amendment of the By-Laws.
C. A change of this magnitude will cause great chaos, divisiness, animosity and turmoil in my Cooperative.
D. The Occupancy Agreement has no provision for amendment and therefore it cannot be amended.
II. The proponents for amendment will say:
A. The document was written decades ago, Cooperative law has evolved considerably since that time and the Board of Directors have a responsibility to modernize the corporate documents to facilitate and incorporate the changes that have taken place in Cooperative law and practice.
B. There are references in the Occupancy Agreement to the FHA, replacement and operating reserves, the FHA as a preferred shareholder and oversight authority by the FHA or other governmental agencies, which may no longer apply to our Cooperative.
C. A prospective lender Bank may question the requirements of oversight authority of the FHA or other administrative body with respect to approval of maintenance increases, mandated replacement and operating reserves, replacement of the Board of Directors and agency rules and regulations which no longer apply to the Cooperative. Who owns this Cooperative, the FHA or the Resident Shareholders?
D. The definitions of who may occupy the apartment, rights of sale and sublet, alterations and additions should be better and more fully defined, in light of current law and practice.
E. The practices and procedures adopted by the Cooperative do not conform to the existing Occupancy Agreement and therefore the Cooperative is presently operating in violation of its own Occupancy Agreement.
F. The Occupancy Agreement can be amended through an amendment to the By-Laws. The Occupancy Agreement is subject to the By-Laws.
III. Audience Survey
A. What type of a Cooperative do you currently live in or serve on the Board of e.g. 213 Coop, State Subsidized or Regulated Cooperative, a Rental Converted to a Cooperative.
B. Does your Cooperative currently have an FHA mortgage?
C. Does your Cooperative operate under an Occupancy Agreement and By-Laws wherein the FHA or other governmental authority is a preferred shareholder?
D. Do your Cooperative's documents require or mandate oversight authority by a governmental agency?
E. Does the governmental agency who has oversight authority over your Cooperative, require that certain replacement or operating reserves be funded on a monthly basis?
F. Has your Cooperative incurred difficulty in mortgage refinancing upon paying off the old FHA or government insured mortgage with current lenders or the lenders representing purchasers of stock in the Cooperative?
G. Are you currently investigating the possibility of rewriting the Occupancy Agreement or Proprietary Lease in your Cooperative and why?
H. Have you re-written the Occupancy Agreement, Proprietary Lease, By-Laws and/or Certificate of Incorporation in your current Cooperative?
I. Do you intend to refinance your Cooperative in the near future?
IV. Standard provisions of an Occupancy Agreement and/or Proprietary Lease.
1. There is no provision contained therein, allowing for an amendment of this document. The standard Proprietary Lease allows for amendment by the shareholders.
2. The Occupancy Agreement was entered into at the time of construction of the Cooperative, provided for subscription of shares and occupancy upon completion of the project. It is primarily a subscription agreement for shares in the Cooperative corporation and upon the purchase of shares, the stockholder is allowed to reside in the Cooperative. The Proprietary Lease is a lease between the Cooperative as lessor and the stockholder as lessee. It contains the standard terminology of a lease, wherein a stockholder is provided with a lease, in consideration of the purchase of stock in the Cooperative corporation.
3. The Occupancy Agreement is usually in effect for a term of three (3) years, thereby allowing the stockholder to terminate his or her stock ownership and have no further obligation to the Cooperative. The Proprietary Lease also contains a provision for cancellation in most instances. The term of the lease is usually thirty (30) years or more.
4. The Occupancy Agreement defines the stockholder as a member, wherein a Proprietary Lease defines the stockholder as a lessee. Initially, in New York as in other states housing Cooperatives were formed under the local laws used to form farm or dairy Cooperatives. The members were not stockholders per se but members of a local Cooperative in which they made an investment or purchased a membership. The evolution of housing Cooperatives and the laws in most states resulted in changes in the law wherein specific statutes were enacted covering housing Cooperatives and defined the rights and obligations of stockholder/tenants. The Proprietary Leases were drafted for the newer Cooperatives or buildings that were converted to Cooperatives to conform to these local laws and statutes. This resulted in the Proprietary Leases providing for the rights and obligations of the Cooperative and the stockholder/tenants, similar to that of a landlord and tenant.
V. Amendment of the Occupancy Agreement.
If the Occupancy Agreement is not amendable, how then can a Cooperative go about amending this document?
1. Do we need 100% of the stockholder tenants agreement?
2. Can it be amended by amending the By-Laws, which the Occupancy Agreement is subject and subordinate to?
3. If the By-Laws are amended and the Proprietary Lease is adopted in place of the Occupancy Agreement by a two-thirds or more of the shareholders, is this Proprietary Lease binding on 100% of the shareholders or not?
4. The standard By-Laws provide that a shareholder approved for membership in the Cooperative will execute an Occupancy Agreement in the usual form adopted by the corporation. If the said By-Laws are amended to replace the Occupancy Agreement with a Proprietary Lease then the Proprietary Lease and its terms and conditions are binding on 100% of the shareholders. The amendment to the By-Laws usually requires two-thirds or more of the shareholders.
VI. The Specific Provisions of the Occupancy Agreement and/or Proprietary Lease.
A. Monthly maintenance (carrying charges).
The Occupancy Agreement provides for:
1. Operating expenses e.g. management, administration, taxes, insurance, utilities, repairs, maintenance, mortgage interest and principal.
2. General operating reserves and reserves for replacements, as mandated by the FHA mortgage.
3. Mortgage insurance premiums and other required payments on the insured mortgage as required by the government agency e.g. HUD or the FHA. There is no definition as to how the maintenance is assessed against each individual unit owner.
B. In a Proprietary Lease:
1. The maintenance is defined as rent and determined as the number of shares owned by the shareholder/tenant bears to the total number of shares in the Cooperative.
2. The lease provides for rent and additional rent.
3. Cash requirements are defined as and for the operation, maintenance, care, alterations, improvements, assessments, necessary reserves if any, obligations, liabilities or expenses. The cash requirements can be modified and increased or diminished as required, by the Board of Directors.
4. The failure to fix cash requirements for any year or portion thereof shall not be deemed a waiver of the covenants or provisions of the lease with respect to maintenance, rents, or additional rent, or a release of the Lessee from the obligation to pay maintenance.
C. Services by the Cooperative:
1. The Occupancy Agreement provides for the Cooperative to furnish gas and electric at no additional cost.
2. The Proprietary Lease usually provides specific definitions of which services will or will not be provided. This may require amendment from time to time.
3. A number of the Cooperatives have discontinued providing gas and electricity as included in the rent, contrary to the specific provisions of the Occupancy Agreements.
D. Patronage Refunds.
1. The Occupancy Agreement provides that within ninety (90) days after the end of each fiscal year such sums collected in anticipation of expenses which are in excess of the annual amount needed for repairs, including reserves, the corporation will refund or credit to the members the sums collected in the discretion of the Board of Directors.
E. Definition of residential use of the premises.
1. The Occupancy Agreement defines the use of the unit by a member and his immediate family. There is no mention of the female gender nor is immediate family defined in many instances.
2. Federal, state and local laws and decisions have defined immediate family. A Cooperative is subject to the statutes and decisional laws as to who may reside in an apartment including but not limited to adoptive or step children, mothers, fathers, aunts, uncles and nieces, nephews, parents, additional occupants, domestic employees and guests. In addition, Cooperatives are required in the Proprietary Leases to comply with applicable zoning laws, building codes or other rules and regulations of government bodies. The Proprietary Lease must conform to the laws of the nineties.
3. The Proprietary Leases provide for use for professional purposes or home occupation uses under and subject to compliance with local zoning laws, building codes or other rules and regulations of governmental bodies.
F. Subletting.
1. The Occupancy Agreement provides for no subletting of the apartment without the written consent of the corporation.
2. The Proprietary Lease provides that a sublet may be allowed only with the written consent by a resolution of the Board of Directors, or given in writing by a majority of the directors or by the other stockholders owning at least two-thirds of the then issued and outstanding shares of stock. In addition, any consent to subletting may be subject to such conditions as the directors or lessee may impose. The said consent in many instances include a charge for sublet on an annual basis or a limit on the number of years that the Board of Directors of the Cooperative may allow a sublet of the apartment.
G. Assignment or Transfer of Shares.
1. The Occupancy Agreement provides for the transfer of shares as follows:
a. Upon the death of a member, a member of the immediate family may assume in writing the terms of the Occupancy Agreement in cases wherein the stock assigned to the deceased stockholder passed to the member of the immediate family by Will or intestate distribution. The surviving member of the immediate family must assume the terms of the Occupancy Agreement in writing. If the member died and the agreement was not assumed by a member of the immediate family, the Cooperative would have an option to purchase the stock from the deceased members' estate.
b. If the member of the immediate family did not assume the stock and lease within a specific period of time, the corporation would have the option to purchase the deceased member's shares of stock for book value.
c. The Cooperative could waive its option to purchase the deceased member's stock or an outgoing member's stock. The Cooperative typically waived their option for a fee e.g. a percentage of the sale price, a specific amount per share or a specific amount per bedroom.
d. The Cooperative corporation has an obligation to assist an outgoing stockholder in selling his or her unit at a price to be designated by the outgoing stockholder.
2. The Proprietary provides as follows:
a. The Board of Directors determines the instrument of assignment, but not to whom the assignment shall be made, by definition. The Board does have a right to approve the proposed stockholder. The said approval is subject to local law and Civil Rights Statutes.
b. The Cooperative does not have a first option to purchase the shares of stock, but in most instances may impose a flip tax.
c. The Cooperative may determine the cost of transfer and procedures e.g. application and approval fees.
d. Certain assignments do not require consent for transfer by one spouse to another spouse, transfers to immediate family, transfers of shares pledged under a financing agreement to a bank as security for a loan used to purchase or refinance the stock assigned to the apartment.
H. Pledge of Shares and Lease.
a. The Occupancy Agreement makes no provision for the pledge of shares or the lease to a Lender to be held by the secured party in consideration of a loan made to the shareholder.
b. The Proprietary Lease Provides:
(i) That the Cooperative shall allow the pledge of the stock assigned to the particular apartment and the proprietary lease to a secured party, provide notices of default by the lessee, allow the Lender to cure any defaults by the lessee and foreclose on the said stock and proprietary lease.
(ii) The Cooperative agrees that it will not without the prior written consent of the secured party: allow the transfer of stock or lease; terminate the stock or lease; allow the assignment of the lease or sublet of the apartment; any modification, cancellation, surrender or termination of the lease, consent to any further loans or pledges of stock; or security interest. It will not unreasonably withhold or delay its consent to approval of a purchaser from the secured party.
(iii) Upon a request by a stockholder/tenant the Cooperative will enter into what is known as a Recognition Agreement with the secured party acknowledging and agreeing to the above mentioned provisions. Any and all costs incurred by the Cooperative in connection with the Recognition Agreement, shall be paid by the stockholder/tenant.
I. Alterations and Additions.
a. The Occupancy Agreement Provides:
(i) In one or two sentences that the written consent of the corporation shall be required to make any structural alterations or in the water, gas, steam, electrical conduits, plumbing or other fixtures.
(ii) In many of the Cooperatives, notwithstanding the Occupancy Agreement the Cooperative has adopted many of the terms and conditions contained in the standard Proprietary Lease thereby operating in violation of the Occupancy Agreement with respect to alterations, appliances and other additions to the apartments.
b. The Proprietary Lease Provides:
(i) That written consent is required by the Cooperative corporation, which shall not be unreasonably withheld or delayed, but sets forth in great detail what types of alterations may be made, that the work may be performed only in accordance with applicable rules and, regulations of the Cooperative and/or governmental agency having jurisdiction.
(ii) In most Cooperatives a specific alteration agreement is provided for with respect to the type of work, detailed plans and permits, insurance requirements, time of work, method of performance, access to the premises and time frame for the commencement and completion.
(iii) What additions or improvements may be made without the necessity for Cooperative consent, as long as they do not require structural alterations or permanent damages to the building e.g. appliances, lighting fixtures, refrigerators, air conditioners, dishwashers, wood work or panelling, ceilings, special doors or decorations, special cabinet work, stair railings or other built in ornamental items, which can be removed without damage to the structure or permanent damage to the apartment.
(iv) The Stockholder shall surrender to the Cooperative the apartment with all additions, improvements and fixtures initially included in the apartment. In addition any improvements, fixtures, or appliances not removed shall at the option of the Cooperative, be deemed abandoned and become the property of the Cooperative.
J. Mechanics Lien.
a. The Occupancy Agreement does not provide for the remedies to the Cooperative if a mechanics lien is filed against the stockholder/tenant's apartment, for work, labor and services performed within the apartment.
b. The Proprietary Lease provides that if a mechanics lien is filed against the Cooperative corporation as a result of work, labor and services performed by a contractor within the stockholder/tenants apartment the stockholder shall cause the said lien to be discharged by payment or bonding or otherwise. If the stockholder/tenant fails to discharge the lien, after appropriate written notice, the Cooperative may discharge the lien by payment or bonding without investigation and shall collect the said monies due as additional rent, including reasonable attorneys fees against the stockholder/tenant.
K. Inspection of Dwelling Unit.
a. The Occupancy Agreement provides for inspection by the Cooperative or its mortgagee bank at any reasonable hour of the day.
b. The Proprietary Lease Provides:
(i) That the Cooperative, its agents or authorized workmen shall be permitted to visit, examine or enter the apartment or any other storage space assigned to the stockholder/tenant at any reasonable hour of the day upon notice or at any time and without notice in case of emergency to make or facilitate repairs.
(ii) The Cooperative may remove such portions of the walls, floors and ceilings as may be required, and the Cooperative shall restore the apartment. The restoration does not usually require restoration of unusual wall decoration or wallpaper.
(iii) The stockholder/tenant shall provide the Cooperative with a key to each lock providing access to the apartment.
c. If tenant/stockholder is not personally present to permit entry to the Cooperative or its agents and has not provided a key to each lock, the Cooperative may forcibly enter the apartment or storage space without liability for damages to effect repairs.
L. Default by a Member and/or Termination of the Lease by the Cooperative.
a. In an Occupancy Agreement on not less than thirty (30) days notice, a stockholder/tenant's right's will expire and the Cooperative may dispossess the stockholder or remove him or her by force or otherwise and repossess the dwelling unit if:
(i). The member shall cease to be a stockholder.
(ii). The member transfers or assigns the shares of stock without consent, is declared a bankrupt, a receiver is appointed for the members property or an assignment is made for the benefit of creditors, the stock is levied upon or sold, under the process of any court.
(iii). The member shall fail to effect or pay for repairs and maintenance or any sums due as additional maintenance or shall otherwise default in the performance of any of his/her obligations.
b. The Proprietary Lease Provides For:
(i) Remedies similar to those set forth above pursuant to an Occupancy Agreement but in addition provides for termination for "lessees objectionable conduct as determined by the Cooperative corporation's Board of Directors.
(ii) In the event that the lessee defaults at any time after the apartment is sublet with the written consent of the Cooperative, the Cooperative may demand and collect rent from the sub-tenant and retain such sums, to pay the stockholder/tenant's obligations pursuant to the Proprietary Lease.
(iii) In the event the Cooperative resumes possession of the apartment either by eviction or otherwise the stockholder/tenant shall remain liable pursuant to the Proprietary Lease for rent/additional rent and/or reasonable attorneys fees. In addition the Cooperative shall have the right to sublet the said apartment as agent of the stockholder/tenant.
M. Subordination Clause.
a. The Occupancy Agreement and By-Laws provide that the FHA or HUD or other governmental agency is a preferred shareholder in the Cooperative and that the stock and Occupancy Agreement are held subject to the following:
1. The obligation to maintain required replacement reserves and general operating reserves in a specific dollar amount on an annual basis. The said funds may only be withdrawn with the permission and consent of the preferred shareholder. (FHA or HUD), with certain exceptions.
2. Maintenance cannot be increased without the consent, of the FHA or HUD.
3. The By-Laws, Occupancy Agreement or Certificate of Incorporation cannot be re-amended without the consent of the FHA or HUD.
4. The Board may be removed or replaced by the agency.
5. The agency may execute additional documents in furtherance of the agency insured mortgage, as attorney in fact for the member stockholders.
N. Corporate Regulations.
a. The Occupancy Agreement Provides that the stockholder/tenant will comply with the rules and regulations of the Cooperative and any amendments thereto along with the other stockholder/tenants.
b. The Proprietary Lease Provides:
(i) That stockholder/tenants will comply with all house rules and the Board of Directors may alter, amend, repeal or adopt new rules. The said rules must be complied with by the stockholder/tenant, his/her family, guests, employees and subtenants. In addition a breach of the house rules shall be a default under the lease. The Cooperative shall not be responsible to the stockholder/tenant for the non-observance or violation of house rules by any other stockholder/tenant or person, other than an employee or agent of the Cooperative.
O. Odors or Noises.
a. The Occupancy Agreement does not usually provide for unreasonable cooking or other odors or noises.
b. The Proprietary Lease provides that the stockholder/tenant should not permit unreasonable cooking or other odors to escape into the building. The stockholder/tenant should not permit or suffer any unreasonable noises or anything which will interfere with the rights of other stockholder/tenants or unreasonably annoy them or obstruct the public halls or stairways.
P. Equipment and Appliances.
a. The Occupancy Agreement does not provide for the use of equipment or appliances as they effect the Cooperative corporations property or building.
b. The Proprietary Lease provides that if in the sole judgement of the Cooperative any tenant stockholders equipment or appliances shall result in damage to the building or are of poor quality or cause interruption of service to other portions of the building, or overloading of, or damage to the facilities maintained by the Cooperative for the supplying of water, gas, electricity, or air conditioning or heating to the building, or if any such appliance visible from the outside of the building shall become rusty or discolored, the tenant stockholder shall promptly, on notice from the Cooperative, remedy the condition and, pending such remedy, shall cease using any appliance or equipment which may create the objectionable condition.
VII. The Process and Procedure.
a. The Cooperatives Board of Directors, along with its attorney, should review in detail the Certificate of Incorporation, the By-Laws, Occupancy Agreement and/or Proprietary Lease and Rules and Regulations.
b. The managing agent and the Board of Directors must review its practices and procedures with regard to maintenance of the premises, alterations, repairs, subletting, resales and assignment of stock.
c. All references to HUD, FHA or other governmental agency as a preferred shareholder or oversight authority must be deleted.
d. The document must be made gender neutral.
e. The document must remove any and all definitions and terms which are discriminatory as to race, creed, color, age, marital status, sexual orientation, gender, disability, occupation and or any and all other state, federal or local, Civil Rights Laws.
Informational meetings must be setup with the shareholders outlining the benefits of amendment of the corporate documents and re-writing of the proposed new Proprietary Lease. A consensus of opinion must be solicited from the stockholder\tenants at the informational meetings and by way of questionnaires in order to formulate a new Proprietary Lease. The Lease should incorporate the great majority of proposed additions and deletions from the original Occupancy Agreement.
A proposed By-Law Amendment would then be proposed at an annual or special meeting which will incorporate the new Proprietary Lease. In the event that the said By-Law Amendment is passed, the new form of Proprietary Lease will be binding upon all of the stockholder\tenants, notwithstanding that less than 100% approve the By-Law Amendment.
