By Jones Osborn II

Arizona is one of several states that recognize the unusual system of ownership known as "community property." Because the community property laws have special application to real estate and certain other kinds of transactions, it is prudent to understand how community property works and how it can affect your business and personal dealings.

What is Community Property? The general rule is that all property acquired during marriage is community property, except property which is inherited or which is received as a gift. Property owned before marriage ordinarily remains sole and separate property. Property acquired during marriage while the couple resides in a non-community property state is separate property and retains its separate character when the couple moves to Arizona.

Property which starts out as separate property can be converted into community property by gift (that is, the spouse owning the property can give it to the community) or by becoming so commingled with community property that its identity is lost. Conversely, community property can be converted into sole and separate property if one spouse makes a gift of his or her community interest to the other.

Control. In Arizona, each spouse has the full right to manage and control community property and to bind the community to debts and obligations. This means that either spouse, without the consent or even the knowledge of the other, can buy or sell community personal property, enter into contracts, borrow money, or engage in other business dealings on behalf of the community.

There are two important exceptions:

1. Both spouses must join in the acquisition, disposition, or encumbrance of real property (including leases of a year or more).

2. Both spouses must join in the execution of a guarantee or indemnity agreement.

What happens if only one spouse signs an agreement that requires the signature of both?

First of all, if it is done fraudulently, it is a felony. Arizona law provides that any person who represents that he or she is authorized to sell or mortgage community real estate, knowing that his or her spouse has not consented, can be prosecuted and sentenced to jail.

More commonly, it simply creates title problems or results in an unenforceable agreement. If community real property is conveyed or leased without the consent of both spouses, the conveyance or lease is void. This is true even if the public records indicate that title is held as the sole and separate property of the spouse who signed. For this reason, it is prudent to learn something about the seller, and if he or she is married, the spouse should be required to either sign the deed or lease or execute a disclaimer deed giving up any community property rights in the real estate. The rule is that community property is community property regardless of how title is held. Don't blindly rely on the public records when it comes to this issue.

If a guarantee or indemnity is executed without the joinder of a spouse, the result is a little different--the instrument is enforceable, but only against the sole and separate property of the signer, but not the community property or the sole and separate property of the other spouse. If one spouse enters into a contract to buy, sell, or lease real property (for a year or more) on behalf of the community--the sole and separate property of the spouse who signed the contract is liable in the event of a breach, but not the community property or the sole and separate property of the other spouse.

Debts and Obligations. Suppose one spouse borrows money or executes some other contract not involving real estate or a guarantee. Clearly, this binds the community, but that's not all. Arizona law provides that any valid claim based on the agreement of one spouse must be satisfied first out of community property, and then out of the sole and separate property of the spouse who entered into the agreement. The sole and separate property of the other spouse, however, is insulated from liability for such claims.

Finally, what about the debts and obligations of a spouse before marriage? Is the community property of the marriage liable? The answer is that the community property is liable, but only up to the value of the sole and separate property of the debtor spouse which he or she contributed to the community. This prohibits unmarried people from escaping their debts and obligations by getting married and contributing all their assets to the community, and it also protects newly-married people from the full impact of the pre-existing debts of the other spouse.

Conclusion. If you are purchasing real property or entering into a lease of a year or more, be sure to determine whether the other party is married and if so, to obtain the consent or disclaimer of his or her spouse. If you or your spouse has sole and separate property, do your best to keep it separate if you desire to protect it from the claims of creditors of the community or the other spouse. And if you accept a guarantee from a married person, be sure to get the signatures of both spouses.