Utilizing a Cosigner Agreement
Late and missed rents are often cited by landlords as being the biggest problems with new tenants. To evaluate an applicant’s potential financial risk to the landlord, i.e., rent defaults, landlords conduct tenant background screenings. Based upon a greater perceived business risk, a landlord may offer conditional acceptance to an applicant by requiring the applicant to provide a cosigner.
Approval of the applicant as the new tenant is contingent upon the cosigner being financially qualified and fully screened to the landlord’s rental standards. If the potential cosigner cannot meet or exceed required standards, the offer of acceptance can be withdrawn since the contingency was not met.
The applicant has the responsibility to provide a qualified cosigner. The decision to accept the cosigner is the landlord’s business decision per his stated rental terms and conditions. There is no law that requires or prohibits the use of cosigners for residential lease agreements with one major exception. Under federal fair housing law landlords must consider cosigners 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. If the proposed cosigner is solvent and stable, federal law requires landlords to accept the applicant regardless of the landlord’s policy regarding cosigner qualifications.
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 lease agreement or a separate cosigner agreement.
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. That is, the cosigner can legally become a cotenant even though not living in the unit. Thus, if not specified otherwise in the executed agreements, 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.
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 written documentation executed by the one guaranteeing the lease agreement on behalf of the prospective tenant.
While landlord and applicant may agree that a cosigner will be used to secure the tenancy, the proposed cosigner must be qualified and willing and able to serve as the financial guarantor for the prospective tenant. Most importantly a cosigner must have a thorough understanding of the legal responsibilities that are required of a cosigner before signing the cosigner agreement.
The proposed cosigner should carefully consider and thoroughly evaluate certain issues before agreeing to act as a cosigner for the prospective tenant. A cosigner is usually a family member or friend with a close personal relationship to the applicant who is willing to help the applicant get established. The personal relationship of trust between cosigner and applicant can be a motivator for the applicant to act responsibly during his tenancy (meeting rent obligations and lease terms and conditions) in order not to take advantage of the cosigner. The applicant and the potential cosigner should discuss this issue in detail before committing to the agreement. Both parties must understand the legal commitment of acting as a cosigner. While parents often cosign for their college age children, asking a friend to cosign a lease agreement is more than asking for just a casual favor. Default by the applicant once he is installed as a tenant has serious consequences for the tenant and his cosigner. Once the lease agreement is signed by the new tenant, the cosigner is likewise committed to fulfill his cosigner obligations for the length of the lease term. A cosigner is not released from his financial obligation until the tenant’s lease terms ends per the lease agreement and all lease terms and conditions have been met.
If things go as planned, it is possible the cosigner will never have to fulfill his financial commitment. If however the tenant defaults, e.g., pays rent late, fails to pay rent, or breaks the lease, the landlord will go directly to the cosigner to collect what is due according to terms of the lease agreement. If both tenant and cosigner default on their obligations, the landlord will be able to file a lawsuit against both parties to collect unpaid rents and damages.
Having a formal, written cosigner agreement emphasizes the legal obligations of both cosigner and tenant and what the consequences will be if the tenant defaults. A cosigner should be sure to read and understand the lease agreement and the cosigner agreement before signing the documents. A signed copy of both agreements should be retained for the cosigner files. Language in the cosigner agreement should make it clear that:
- The cosigner is only providing a financial guarantee and has no rights to tenancy or other type of occupancy.
- The cosigner agrees to the landlord’s standard rental lease terms and conditions. In addition the cosigner agrees to submit a rental application, submit to the same tenant screening procedure, and meet or exceed the same qualifying criteria as any tenant applicant. The same application and processing fees required for applicants are also required for a cosigner.
- The cosigner is jointly and severally responsible with the tenant for any and all financial obligations of the tenant under the lease agreement including but not limited to rent, deposits, fees, or other charges as a result of damage to the unit.
- The cosigner acknowledges that the landlord has no obligation to give notice to the cosigner if tenant defaults.
- The cosigner agrees to appoint the tenant as the cosigner’s agent for service of process in the event of any lawsuit that might arise from the agreement, releasing the landlord from any obligation to separately serve the cosigner directly.
- The cosigner acknowledges the landlord may demand that the cosigner perform per the cosigner agreement in the event of tenant default without first using any of tenant’s security or other deposits.
- The cosigner shall remain liable for the performance of any assignee or sub-lessee of the tenant unless expressly relieved by written termination of this condition by the landlord.
- The prevailing party of any legal action brought by either party to enforce any part of the agreement will recover reasonable attorney fees, court costs, and other expenses associated with collection of a judgment.
Utilizing a cosigner agreement as additional financial security against a tenant rent/damage default does not guarantee a perfect tenancy. Thorough tenant screenings are necessity to determine if there are issues of concern in the tenant’s background that should be evaluated further.