Should the landlord add the co-signer to the tenants lease agreement?
Question
Applicants who don’t qualify financially are offering to have a co-signer. What benefit do I as landlord get from this? Do I add the co-signer to the lease agreement?
Answer
The following discussion is an abbreviated version of an article I once wrote for the Web site.
Cosigners or guarantors are sometimes of importance when rental market conditions result in no applicants who meet a landlord’s qualifying criteria. They are also particularly useful when the location of the rental property means that most applicants are college students who depend on their parents for much of their income or for anyone else who has little or no credit history of their own.
A guarantor is often differentiated from a cosigner as someone who assumes certain financial liabilities for a lease, but does not actually sign the lease agreement itself and, accordingly, has no rights to the premises. However, no matter what the person is called, it is best to adequately define all rights and responsibilities in documentation executed by the one guaranteeing the lease agreement on behalf of the tenant-to-be.
Depending upon laws of particular states, there may be little or no legal difference between a cosigner and a guarantor. However, while the terms cosigner and guarantor are often used interchangeably, they can be significantly different, depending on state law and/or on the clauses contained within the documents. In particular, there can be a significant difference between a cosigner and a guarantor if the cosigner becomes a co-tenant rather than simply financially liable for the tenant due to the manner in which the agreement is constructed.
In some states, a cosigner for a lease agreement is the same as a signer of the lease agreement. Accordingly, absent adequate language in the lease specifying otherwise, the cosigner may have all the same rights as a tenant who resides in the subject rental unit or doing business in a commercial rental property. That is, the cosigner can become a co-tenant even though not living in or doing business in the leased premises. Thus, if not specified otherwise in whatever documents the cosigner executes, it is important that cosigners for a lease agreement be served with all notices or other legal documents (e.g., eviction complaint) that are served on those signers who are occupying the unit.
There are basically two different types of guarantees, broad and narrow. As examples, a broad form might make the guarantor liable for all financial matters including rents and damages, whereas a narrow form might limit the guarantor’s liability to the rent.
The cosigner and guarantor documents are often drafted so that there is little or no difference between the two. Both agreements are contracts between the guaranteeing party and the landlord, so they can pretty much be written however those parties can agree and the terms of the agreement are much more important than the title given to it. For simplicity, I will hereinafter use only the term “cosigner” even though all discussion will apply no matter the title of the agreement. Although there are times when there will be multiple cosigners for the same tenant, I will use the singular term “cosigner” unless specifically talking about more than one cosigner.
Whatever the title of the agreement, it is important that the language makes it clear that the co-signer is only guaranteeing financial aspects of the tenant’s lease and is not occupying the premises pursuant to the lease and that the cosigner does not become a tenant.
There are as many different formulations of cosigner agreements as there are publishers of the document. While landlords may wish to start with a form of the document available from a particular source, it is usually best to develop one’s own document if the obtained document does not include the terms I mention in this discussion.
Cosigner agreements can be written to cover only an initial lease term or to include future extensions and/or renewals.
Although lease agreements should always contain clauses prohibiting (within the limits of state law) subletting or assignment without the landlord’s written permission, cosigners should always be held responsible when the tenant sublets or assigns his leased premises during the term of the guaranty.
The cosigner agreement should always make the cosigner fully responsible for the full amount of any reasonable legal and other fees that become necessary because of the tenant’s default on the lease.
When there are multiple tenants, cosigners should, if possible, be made jointly and severally liable for the lease rather than only for obligations of the co-tenant who was required to provide a cosigner. After all, the lease agreement should make each co-tenant jointly and severally liable and the reason for having a cosigner is because the subject applicant is not qualified to be severally liable in the event of default of his co-tenants. A landlord is usually most likely to collect from the one who is best financially qualified and/or the one who is easiest to serve with a lawsuit if some of the co-tenants disappear.
It is best to require a cosigner who lives in the same state as where the rental property in order to avoid the extra trouble and expense of collecting a judgment in another state. This will not always be possible when parents are cosigning for a college student enrolled in another state.
Each cosigner should complete a separate application form, be required to prove identity, submit to the same financial screening procedure, and meet the same qualifying criteria as any tenant applicant. The same fees required from applicants should also be required for a credit report and all other screening reports that the landlord performs.
If a cosigner does not sign the lease agreement in person in the landlord’s presence after providing proof of identity, it is very important that the signature be notarized in order to reduce the possibility of fraud.
If a lease is modified in any way during the guaranty period, the cosigner should be required to sign a new document covering the modified agreement, whether the modification is done via a new lease agreement or amendment to the old agreement.
The cosigner agreement should designate the tenant as the cosigner’s “agent for service of process” and also state that the cosigner or guarantor is not entitled to service of any notices that might be served on the tenant or have any other rights of a tenant. By doing this the landlord need only serve notices or lawsuit complaints on the tenant and does not have to personally serve notices or complaints on the cosigner. It will usually be easier to serve the tenant and it will be up to the tenant to inform the cosigner about notices and complaints filed on the cosigner. Failure of the tenant to notify his cosigner will allow the landlord to obtain a default judgment against the cosigner.
The agreement should make it clear that the co-signer is only providing a financial guarantee and has no rights to tenancy or other type of occupancy. This is to avoid the need to evict the cosigner before obtaining possession in the event of serious problems, an unneeded additional complication.
While one can add the desired clauses and basic cosigner contact information and signature and date lines at the end of the lease agreement, an adequate cosigner agreement is best done as a separate document that refers to the premises, parties, and date of the lease agreement. The agreement should also state that the cosigner has read the lease and that a copy of the lease agreement is attached – and should be done.
Although the cosigner agreement should explicitly continue the cosigner’s responsibilities when the lease agreement is amended, renewed, or otherwise modified, it is still advisable to require that the cosigner sign a new document related to the modified lease.
Many landlords prefer to avoid allowing applicants to qualify via cosigners because of the extra work involved and the limited practical value of them. Fair housing laws prohibit discrimination on the basis of a number of characteristics, but, if the applicant does not qualify because of documented bad credit history, denial would not be on a prohibited basis and that would be demonstrable.
However, there is one situation when landlords must consider cosigners under federal fair housing law. This is when an otherwise suitable disabled applicant having insufficient income to qualify on his/her own requests the use of a cosigner who is willing to pay the rent if needed. In this case, so long as the proposed cosigner is solvent and stable, federal law requires landlords to accept the applicant regardless of the landlord’s policy regarding cosigner qualifications.