Few in the “doing leases” business think much about the ECOA. It’s been around since 1989. The following year, the Federal Trade Commission adopted Regulation B, implementing the Act. And yet, some readers are learning for the first time that we’re talking about the Equal Credit Opportunity Act. Many others will be learning for the first time that it applies to lease guaranties and if you don’t comply, some guaranties they got were a waste of good paper. Whatever other consequences there may be if you improperly insist on getting a spousal guaranty, a big one is that a court will throw it out, plain and simple.
The EOCA limits whether a landlord can seek a guaranty from a tenant’s spouse or from a spouse who does not have an ownership interest in an entity-tenant. The Act doesn’t just apply to credit applicants. While a landlord can require a guaranty from a shareholder, member, partner or even an officer of its prospective tenant, it can’t automatically requires their spouses to also sign the guaranty, even if the guaranty is supported or secured by jointly owned property. Community property is different because, in states where that is the form of ownership, a spouse must sign a “note” to grant a landlord (think, creditor) access to the property.
The ECOA extends “protected class” protection to other categories of people, but in the business of leasing to small businesses, it is the category of “spouse” that is encountered every day. Many landlords automatically require the “tenant-owner” and her or his spouse to sign without ever looking at the “credit” behind the request. Yes, the form letter of intent says it loud and clear: “Guaranty – all owners and their spouses.” But the ECOA, in effect, says that you need to examine if there is enough credit to begin with. As a practical matter, landlords need to obtain each tenant’s financial information and then the same information from the tenant’s actual owners. Only if a landlord reasonably concludes that the financial strength of the tenant and its owners is insufficient, may it even ask for a spouse’s financial information, let alone insist on getting a spousal guaranty as a condition of executing a lease. While there doesn’t appear to be any dispositive case law on the subject, it would appear that, even if the credit behind the lease is insufficient, insisting on a spousal guaranty without looking at that spouse’s credit can leave a landlord with a guaranty a court will not enforce.
Even where an individual tenant or the principal of an entity tenant-jointly owns property with a spouse, you can’t just say – “I need your spouse on this guaranty.” If there are lesser steps that can be taken, such as merely having the spouse grant a security interest (e.g., sign a mortgage), thus making the entire property available for collection, that is evidence that taking a guaranty from the spouse was unnecessary.
Where the combined credit of the tenant and the tenant’s principals “comes up short,” there is nothing wrong in insisting on a supplemental guaranty; you just can’t insist that it comes from a spouse. The tenant can offer an equivalent “value” guaranty from some other individual.
Don’t say – “but, I need the spousal guaranty because the principal guarantor can easily transfer her or his assets to the spouse.” Congress knew that, and it passed the Act anyway. It said, “no you can’t, we have fraudulent transfer and conveyance acts for that situation.” Also, it isn’t enough to recite that the spousal guarantor will derive a pecuniary benefit from the lease, even when true. If those were “magic words,” the ECOA would have no meaning at all when it comes to protecting spouses.
Among those few creditors (and even fewer landlords) who understand the ECOA’s restrictions, some make it their practice to require an “ECOA Release” from the guaranteeing spouse. In such a document, the spouse “says” that he or she releases the creditor or landlord from all claims relating to the credit. There is case law in both directions, with some decisions holding that a spouse is free to enter into a contract, even one that waives certain rights under the ECOA. At least one such opinion appears to have been influenced by the “real” negotiation that preceded the giving of the spousal waiver and the heavy legal advice the spouse had received during those negotiations. Other courts, in what seems to be the trend, essentially hold that the ECOA is protective and remedial legislation whose protections can not be waived.
By the way, these rules apply just as well to lenders and those who represent lenders. Brokers, too. Just change the label from landlord to lender or broker and change the examples.
So, what do we need to do? We need to evaluate the “credit” behind the lease before even talking “spouse, for the sake of spouse.” Then, we need to be reasonable if we want to reach beyond the tenant and its owners and “go for a spouse.” Then, if what we’ve already seen isn’t good enough, we can ask for an additional guarantor without insisting that it be an uninvolved spouse. If a spouse is offered as an additional guarantor, we need to look at the spouse’s financials. If a guaranty from the spouse would really add to the overall credit, then accept it and ask for a spousal waiver. Sounds like too much work, then just do it the “old way.” Take the spousal guaranty and pay the legal fees to learn that it is unenforceable.
If anyone out there who has been requiring lease guaranties has never automatically asked for the spouse’s as well, send your name to Ruminations. We’ll have a drawing and find a suitable (value-priced) prize for the winner. We’re not buying and prizes in advance however.