Proprietary Lease: What It Covers vs a Deed

A proprietary lease is the contract between a co-op corporation and one of its shareholders that gives the shareholder the right to occupy a specific apartment. It is called a lease, but the person holding it is also an owner of the corporation. Fannie Mae describes what a lender takes as security for a co-op share loan: the borrower's ownership interest in the co-op housing corporation, represented by stock or shares (or by a membership certificate or other contractual agreement), together with an assignment of the borrower's rights under a proprietary lease or occupancy agreement. In other words, the shares and the lease travel together, and neither one is a deed.

This page explains how a proprietary lease differs from a deed, which topics public agency sources say these leases and occupancy agreements address, how subletting, alterations, house rules and default work in the regulated New York examples, and what to ask for before you buy. For the basics of the building structure, read what is a co-op apartment.

Lease versus deed

When you buy a house or a condominium unit, you receive a deed to real property. When you buy a co-op apartment, you receive shares and a lease. HPD, New York City's housing agency, says owners of co-op apartments are called shareholders because they have purchased shares in a cooperative corporation that owns real property.

Question	Deed (house or condo unit)	Shares plus proprietary lease
What do you hold?	Title to real property	Shares in the corporation and a lease from it
Who owns the land and building?	You (a house) or the unit owners together (a condo)	The corporation
What gives you the right to live there?	Your title	Your lease, tied to your shares
What does a lender take as security?	A mortgage on the property	The shares and an assignment of the lease (Fannie Mae)

Federal tax law uses the same logic. Section 216 of the Internal Revenue Code defines a cooperative housing corporation as one that, among other conditions, has only one class of stock outstanding and in which each stockholder is entitled, solely by reason of owning stock, to occupy a house or an apartment in a building the corporation owns or leases. The same section calls such a holder a tenant-stockholder. That is the legal shape behind the lease: the right to occupy flows from the stock.

The documents that go together

A co-op purchase involves several documents that work as a set.

Document	What it is	Where it matters
Share certificate	Evidence of your shares in the corporation	Ownership and sale
Proprietary lease or occupancy agreement	Your right to occupy one apartment and your duties	Daily living, sublets, alterations
Bylaws and certificate of incorporation	How the corporation and its board work	Votes, board powers, restrictions
House rules	Day-to-day rules for the building	Noise, pets, moves, alterations

HPD lists several of these when it tells HDFC shareholders where to look for the rules that apply: the governing documents, including the bylaws and certificate of incorporation, any agreements binding the HDFC, the proprietary lease and the share certificate. In HPD's own Mitchell-Lama training for shareholders, the occupancy agreement is the document that grants shareholders the right to live in their apartments and details their rights and obligations.

What a proprietary lease or occupancy agreement covers

Public agencies that oversee regulated co-ops describe the topics these documents address. The table below sticks to what those agencies say.

Topic	What the agency sources say
Occupancy as your home	HPD says Mitchell-Lama shareholders must occupy the apartment as their primary residence, and that almost all HDFC certificates of incorporation require owner-occupancy
Repairs	HPD says shareholders are generally responsible for repairs within the walls of their apartment and for damage outside it that they cause
Alterations	HPD says shareholders pay for alterations or upgrades to their unit, and management approval is required for any work inside the apartment
Insurance	HPD says insurance requirements are often spelled out in the occupancy agreement or the house rules
Subletting	HPD's guidance and its rules restrict or forbid it (see below)
Charges owed	HPD's rules say an eviction proceeding based on unpaid rent, carrying charges or other sums due under the lease or occupancy agreement needs no HPD hearing
Sale charges	HPD says the amount of an HDFC flip tax is found in the governing documents, the proprietary lease and the share certificate
Term	HPD's Mitchell-Lama rules set a minimum one-year term for leases and occupancy agreements

In a market-rate co-op the lease is the corporation's own document, and what it covers is whatever it says. Nothing here predicts your building's terms. Read the actual document.

Alterations

HPD tells Mitchell-Lama shareholders that they are responsible for the cost of alterations or upgrades to their unit, giving the example of replacing kitchen counters or cabinets, and that management approval is required for any work performed inside a shareholder's apartment. It adds that, depending on the housing company's move-out policy, a shareholder who leaves may be responsible for restoring the apartment to its original state, and that the occupancy agreement has the details for each development. HPD's training adds that when the housing company performs repairs that are the shareholder's responsibility, the shareholder is charged for the cost.

In any co-op, find out before work starts whether approval is needed and from whom. The lease or house rules should say, and the managing agent can confirm. Ask before you hire a contractor. For how an owner's insurance treats improvements inside the apartment, see co-op apartment insurance.

Subletting

Subletting is where proprietary leases are most restrictive, and where the two New York affordable programs are explicit.

HDFC co-ops. HPD says almost all HDFC co-ops limit subletting. In general, short-term subletting with the board's permission is acceptable where the shareholder intends to return to the apartment, but long-term sublets are not permissible, and all subtenants must meet the co-op's income eligibility requirements. HPD tells shareholders to check the governing documents and any agreements binding the HDFC.
Mitchell-Lama co-ops. HPD says short-term renting such as Airbnb is strictly prohibited and longer-term subletting is forbidden. Its rules say no cooperator has the right to sublet without prior written approval of HPD and the housing company, which is given only in exceptional circumstances including military service, and that no cooperator may assign a lease or occupancy agreement. The rules also list an unapproved sublet among the facts considered when deciding whether the apartment is the cooperator's primary residence.
Market-rate co-ops. The lease and bylaws decide whether subletting is allowed and on what terms. See pros and cons of co-op living.

If you may need to rent the apartment out some day, read the subletting clause before you make an offer. HPD's training says noncompliance with the primary-residence rule is grounds for eviction through a "non-primary" action, which shows how seriously a regulated co-op can treat the point.

House rules

House rules sit beside the lease. HPD's shareholder training says house rules are generally applicable to each shareholder and to all family members, guests and visitors, and that they normally cover a wide range of topics to promote the orderly and peaceful enjoyment of common facilities and individual apartments. Its list of common topics includes community room use, pets, garbage disposal, noise, move-ins and move-outs, alterations, smoking and e-bikes. HPD says that when a resident breaks a house rule it can lead to an administrative charge or, in cases of repeated serious violations, an eviction proceeding.

Ask for the current version of the house rules and how the building changes them.

Default and termination

The lease sets out what counts as a default and what happens next. The regulated New York rules give a clear picture of one process.

Under HPD's Mitchell-Lama rules, a housing company cannot start an eviction proceeding based on a holdover or a breach of the lease or occupancy agreement without a certificate of eviction from HPD, issued after an administrative hearing before an HPD-designated hearing officer. The rules say that no hearing or certificate is required for an eviction proceeding based on non-payment of rent or carrying charges, or any sum that counts as rent or additional rent under the lease. For cases that do need a hearing, the rules describe these steps:

The housing company sends a preliminary notice of grounds for eviction, by first-class and certified or registered mail and by personal delivery or another listed method.
The notice states the specific charges, the opportunity to appear before an HPD hearing officer, the right to retain counsel and the effect of the hearing officer's findings.
If the breach is not cured after ten days from service, the housing company may ask HPD to schedule a hearing.
If the hearing officer finds grounds, the officer issues a certificate authorizing the housing company to start summary proceedings. The decision may include a probationary period or an opportunity to cure.

This is one regulated program's procedure. A market-rate co-op follows its own lease and state law, so ask a co-op attorney what a default looks like under your lease.

If you receive a default notice, act within the cure period it gives: write to the managing agent and call a housing lawyer or legal aid straight away.

Approval, closing and lenders

The lease is assigned to you at closing along with the shares. Board approval happens first, as described in the co-op board approval process.

If you borrow to buy, the lender's file reflects the lease. Fannie Mae's selling guide lists a co-op recognition agreement, assignments and evidence of share ownership among the documents involved in a co-op share loan. Read co-op share loans for how lenders look at shares and lease together.

What the tax law says about the lease

The tax code mentions the proprietary lease directly. Section 216(c) says that stock allocable to a proprietary lease or right of tenancy in depreciable property is treated as depreciable property, to the extent the lease is used by the tenant-stockholder in a trade or business or to produce income, with the depreciation limited to the adjusted basis in the stock. Section 216(a) allows a tenant-stockholder a deduction for a proportionate share of the corporation's real estate taxes and qualifying interest, subject to the section's conditions. These are statements of what the statute provides, not tax advice. Ask a tax professional how they apply to you.

Reading a proprietary lease before you buy

You do not need to be a lawyer to see what matters. Before you make an offer, ask for the lease, the bylaws and the house rules, and have a lawyer who handles co-op sales review them. Look for answers to these questions:

Who must live there? Find who must occupy the apartment, and whether time limits apply.
What are you paying for? Find how the monthly charge is set and what else you can be billed.
What can you change? Find the alteration rules and who must approve.
Can you rent it out? Find the sublet clause and any fee or time limit.
What happens if something goes wrong? Find the default and cure steps.
What must you insure? Find the insurance requirement and compare it with your policy.
What does a sale cost? Find any flip tax, transfer fee or consent requirement.
Do other documents override it? In an HDFC co-op, HPD says each HDFC must comply with the most restrictive requirements in place, so a regulatory agreement can limit what the lease says. In Mitchell-Lama developments, HPD's rules make the form of lease subject to HPD approval.

Frequently Asked Questions

What is a proprietary lease?

The document that gives a co-op shareholder the right to occupy one apartment in the corporation's building. It is tied to the shareholder's shares: a lender takes both, and a sale of the apartment transfers both.

Is a proprietary lease the same as a deed?

No. A deed transfers title to real property. A co-op buyer receives shares in the corporation that owns the building, plus a lease to occupy a unit. HPD says shareholders own shares in a cooperative corporation that owns real property.

Is a proprietary lease the same as an occupancy agreement?

Fannie Mae's guide refers to a proprietary lease or occupancy agreement, and HPD's Mitchell-Lama training uses the term occupancy agreement. In each case it is the document that grants the right to occupy a unit. Terms differ by building.

Can I sublet my co-op apartment?

Only as far as your lease and the board allow. HPD says almost all HDFC co-ops limit subletting. For Mitchell-Lama co-ops, HPD's rules allow a sublet only with prior written approval of HPD and the housing company in exceptional circumstances, and HPD says short-term rentals such as Airbnb are prohibited.

Can I renovate my co-op apartment?

Usually with approval. HPD tells Mitchell-Lama shareholders that management approval is required for any work inside the apartment and that the shareholder pays for alterations. Check your lease and house rules.

Who can end my right to live there?

The lease sets out the grounds. In HPD-supervised Mitchell-Lama co-ops, an eviction for breach generally needs a hearing and certificate from HPD, while non-payment cases do not. A market-rate co-op follows its own lease and state law.

Does the lease say how much I pay each month?

Read how the lease sets the monthly charge and what else can be billed. In Mitchell-Lama developments, HPD's rules say an eviction proceeding based on unpaid carrying charges or other sums due under the lease needs no HPD hearing.

Who approves a buyer?

The board, in most co-ops. See the co-op board approval process.

Does the proprietary lease affect my taxes?

The tax code mentions it in section 216, which sets out how a tenant-stockholder's share of taxes and interest and depreciation on a business-use lease are treated. Ask a tax professional how this applies to you.