Should you accept late payments?

Well, that’s your call. But if you do, better be clear when you’re done accepting them, is the holding of an Arkansas Supreme Court case from last year, Turley v. Staley.

In this case, Mr. Turley bought a 45 acre tract in Pulaski County from Gerald and Billie Staley for $62,250, and put 10% down. His contract provided he would pay the balance in 180 monthly installments of $578.29 due on the first of each month and late on the 10th. It also provided he was to pay the property taxes, there was no penalty for prepayment, and if he cut timber off it the proceeds would go to the debt.

The contract also contained a time is of the essence clause. The clause stated if Turley was late more than 30 days on any payment, the Staleys could declare the whole debt due, or treat all payments to date as rent and continue on as a month to month tenancy.

Within a year, Turley started making late payments. He would consistently fall 3-4 months behind and then get caught up. Also, the Staleys divorced, and the court awarded Mrs. Staley the payments for 4 years, and if they were late, Mr. Staley was to pay that amount to her. Mrs. Staley then filed bankruptcy, and Mr. Turley was to make the payments to the trustee.

Couple more years pass, and the late payment tradition continues. The trustee sends Turley a letter telling him to get caught up or he will take possession of the property. Turley gets caught up, and the trustee sends another letter saying thanks for the payment and giving instructions on how to make the next one (don’t pay Mr. Staley the whole amount, essentially). Turley falls behind again, and this time Mr. Staley sends a letter saying essentially “My wife has to get paid and I can’t pay her if you don’t pay me so pay or I’m getting a lawyer”. When Turley didn’t receive any payments, Staley sent another letter saying the contract was “terminated and forfeited”, and wanted him out by late March, 2007.

Turley responds to this by filing suit to quiet title against the trustee and Staley and interpleads what he says is the balance of the payments into the court. They counterclaim for eviction. The trial court kicks him out and declares the contract void and awards the property to the Staleys.

The Supreme Court reversed the trial court on two grounds. We’ll deal with one of them, waiver, here. Turley argued that the course of dealing of the parties over time. The court summarized the law as follows:

A seller may waive his right to compliance with the terms of the contract where he has established a course of dealing by accepting late payments from the buyer. The waiver remains in effect until such time as the seller notifies the buyer that the seller will no longer accept late payments and will henceforth require strict compliance with the contract

then turned to the facts:

Between 1996 and 2006, the Staleys accepted late payments with regularity and without repercussions to Turley, despite their contractual right to insist on the full balance due or to rescind the agreement. Similarly, bankruptcy trustee Randy Rice accepted late payments from Turley in 2005 and 2006 with no consequence to Turley other than late fees. This conduct clearly established a course of dealing at variance with the terms of the contract, and under the holdings in Ford Motor Credit, Mercedez-Benz Credit Corp., and Duncan, supra, Rice and the Staleys waived their right to the contractual remedies for late payments.

So there you go. You accept late payments, you’re stuck, right? Not quite. The Supreme Court left those of us that have a lot of patience an out:

They could have reinvigorated the contract by notifying Turley that they would no longer accept late payments and that they would henceforth demand strict compliance with the contract’s payment terms. But on this requirement, Rice and the Staleys fell short.

In short, you can let the slow payer, be they a tenant or any kind of debtor, remain slow, but you’re establishing a course of dealing the courts will hold you to. Before you can force them current, you need to clearly state (I’d recommend a certified letter) that you will no longer tolerate late payments and will be holding them to the explicit terms of your agreement.