PROMISSORY NOTE AND PAST DUE AMOUNTS WORKOUT AGREEMENT USE

There will come a time when a resident who has vacated the premises owing you money returns and tries to make payments arrangements to pay what is owed to you. In other situations, a current resident may fall seriously behind or owe you for something due under the lease, such as an accumulated water bill, a bounced security deposit check or some damages they did to the premises. The form you use will determine the action you can take in the event the resident fails to pay pursuant to the arrangement you have made. Unfortunately, we always need to be prepared for what will occur when the resident fails to abide by an agreement. An agreement without consequences is useless, and using a wrong agreement can often be worse than using nothing at all. This article will examine a very common form known as a promissory note and a less common form developed by our office called the Past Due Amounts Workout Agreement. These forms are not the same and are to be used in specific situations.

The Promissory Note

A promissory note is simply an agreement when one party agrees to pay another party a particular past due sum or currently due sum on a particular date or dates.

When Should it be Used?

A promissory note should be used only with a PAST or departing resident who owes you money and desires to pay you on a certain date or dates according to the payment arrangement spelled out on the promissory note. Never should it be used with a current resident. The resident may vacate owing you past due rent, late charges, unpaid utility bills or anything owed under the terms of the lease or Florida law. This will memorialize the debt in writing and can be used later if the past resident defaults, and you wish to pursue the debt.

When Should a Promissory Note Never be Used?

A promissory note should not be used with a current resident who owes you money. This is a common mistake by managers. This is the scenario: the resident will be in default for 2 months’ rent in the amount of $1600.00. The manager, thinking that the promissory note is the way to go, will write up the document stating that the resident owes $1600.00 and will pay $200.00 per week beginning on a particular date until paid in full. Now for the problems. First, unless the promissory note clearly states that the amount is “rent” due under the terms of the lease, the manager may have unwittingly converted past due rent into simply a monetary obligation for which he will not be able to evict the resident using a Three Day Notice! The second problem is that if the resident fails to make a payment, what is owed: the full balance all at once, OR only that missed payment? Without an acceleration clause in the promissory note, the resident will only be in default for that one payment, rather than the whole amount. This was certainly not the intention of the manager when the promissory note was created.

Procedural Aspects of the Promissory Note

Filling out a promissory note incorrectly can be worse than not ever having one. Take your time, and fill out all the dates and amounts carefully, have the document signed, preferably with 2 witnesses. If a person other than the actual debtor is going to give you a promissory note, the signature of that person MUST be witnessed by 2 witnesses per Florida law. It is not necessary to have the document notarized, but certainly will not hurt if the debtor tries to say that he or she did not sign the promissory note. The payment plan, if any, dates and amounts should be spelled out with as much particularity as possible. Having the exact date and amount of each payment clearly listed out is preferable to stating “$200.00 per week”, and not having a starting date can really cause a problem. You will see that the sample promissory note below has an “acceleration clause”. The purpose of this clause is to make the full balance due and owing immediately if a payment is missed. We do not recommend that this acceleration clause ever be used maliciously, but allowing deviation from a payment plan can adversely affect enforceability of the promissory note, much as accepting rent late over and over again can cause a waiver and estoppel issue. You may notice this wording in the promissory note: “In the event the payments are not timely made, the acceptance of the payment(s) late or in partial amounts not according to the above schedule shall not constitute a waiver in any way of the creditors”. While you would think that this would prevent a waiver from occurring, in reality, your course of conduct may still create a waiver.

THE SAMPLE “PROMISSORY NOTE”

THE UNDERSIGNED HEREBY AGREE THAT AS OF ___________ (DATE) THE SUM OF$_______________ IS OWED TO _______________________________________________. (INSERT NAME OF MANAGEMENT COMPANY, APARTMENT COMMUNITY, YOUR NAME)

THE UNDERSIGNED AGREES TO PAY ABOVE DUE AMOUNT OWED IN THE FOLLOWING MANNER :( INSERT EXACT PAYMENT SCHEDULE)

$________ DUE _________
$________ DUE _________
$________ DUE _________
$________ DUE _________

IN THE EVENT THE UNDERSIGNED FAILS TO MAKE THE ABOVE PAYMENTS IN THE MANNER PRESCRIBED, THE FULL AMOUNT OF THE DEBT MINUS ANY AMOUNTS PAID SHALL BE DUE AND PAYABLE IMMEDIATELY. IN THE EVENT THE PAYMENTS ARE NOT TIMELY MADE, THE ACCEPTANCE OF THE PAYMENT(S) LATE OR IN PARTIAL AMOUNTS NOT ACCORDING TO THE ABOVE SCHEDULE SHALL NOT CONSTITUTE A WAIVER IN ANY WAY OF THE CREDITORS. IN ANY LITIGATION, THE PREVAILING PARTY SHALL BE ENTITLED TO AN AWARD OF ATTORNEY'S FEES AND COSTS.

THE UNDERSIGNED AGREES THAT THIS CONSTITUTES THE ENTIRE AGREEMENT REGARDING PAST DUE AMOUNTS AND ANY MODIFICATION TO THIS AGREEMENT MUST BE IN WRITING TO BE CONSIDERED VALID.

Dated: ___________________

___________________________ NAME

_____________________________
Witness

_____________________________
Witness

The Past Due Amounts Workout Agreement

When Should it be Used?

This form should be used if a manager wishes to make payment arrangements with a CURRENT resident on past or current amounts owed by the resident. This is a resident who is currently residing on the premises and intends to stay and pay the amounts owed.

What Can Be Put on the Past Due Amount Workout Agreement?

Rent, late charges, bounced security deposit check, damages the resident has caused, and any other amounts due to the manager all can be put on this agreement. The major difference here is that the resident is living on the premises, and the manager needs to not only memorialize the debt in writing, but also needs to be able to take swift definitive action to REMOVE the resident in the event the resident fails to pay according to the agreement. Unlike the promissory note, the Past Due Amounts Workout Agreement converts the amount due completely into RENT. If that “rent” is not paid as per the agreement, the manager can then put the amount on a Three Day Notice and proceed with an eviction. Again, an acceleration clause is used which will make the full amount owed at once if the resident fails to make the payments per the agreement. We have seen many situations in which the manager used a homemade agreement, puts in all the payment amounts and due dates, only to find out that when the resident defaulted, all the manager could put on the Three Day Notice was the missed payment, or possibly, was not able to use a Three Day Notice at all, causing confusion and delay.

Procedural Aspects of the Past Due Amounts Workout Agreement

The same procedures should be used as with the promissory note. Specific payment dates and amounts should be listed. If there is more than one resident on the lease or residing on the premises, get ALL residents to sign. This is crucial.

THE SAMPLE “PAST DUE AMOUNTS WORKOUT AGREEMENT”

The undersigned Resident(s) hereby agree that as of _____________________ (DATE) the sum of _______________ is owed to Manager for the following
__________________________________ (List things like past due rent, bounced check, check charges, utilities etc)

In addition to all other amounts which may become due under the terms of the tenancy or Florida law, Resident(s) agree to pay the past due amounts owed in the following manner: (insert exact payment schedule)

$________ DUE _________
$________ DUE _________
$________ DUE _________
$________ DUE _________

In the event Resident(s) fail to make the above payments in the manner prescribed, the full amount of the original debt minus any amounts paid shall be due and payable immediately as rent and Resident may be served with a Three Day Notice for these amounts owed. Failure by Manager or its agent to serve a Three Day notice in the event the payment(s) are not timely made, or the acceptance of the payment(s) late or in partial amounts not according to the above schedule shall not constitute a waiver in any way of the Manager's rights, and Manager and/or its agent may still serve a Three Day Notice demanding full payment at any time if Resident(s) are in default.

Resident(s) agree that this constitutes the entire agreement regarding the above mentioned past due amounts owed, and any modification to this agreement must be in writing to be considered valid.

Dated: ___________________

__________________________
RESIDENT

_____________________________
Witness

_____________________________
Witness