The Kansas Court of Appeals has held that a lender that consistently accepts late payments from a borrower waives its right to require “prompt payment,” and may not accelerate the note without prior notice of an intention to deviate from the “late payment” course of conduct. Foundation Property Investments, LLC v. CTP, LLC, 159 P.3d 1042, 2007 WL 1518298 (Kan. App. Ct., May 25, 2007).

The facts in Foundation Property Investments, LLC, are relatively straight-forward. In 2004, the Borrower, CTP, delivered a note in favor of Foundation Property Investments, LLC, which was payable in approximately 50 monthly installments. CTP timely made the first four payments under the note; however, CTP made the next 10 monthly payments to Foundation well after the due date. Each of these payments was Paymentaccepted by Foundation and applied against the obligations. After the 10th “late payment,” Foundation accelerated the balance of the note and commenced a collection action.

TP defended the collection action on the basis that the course of conduct between the parties (i.e., CTP’s late payments and Foundation’s acceptance of the same) resulted in a “change” to the note, and that Foundation waived its right to accelerate the note for failure to pay within the time constraints stated therein.

The court began its analysis by stating that in order for CTP’s position to be validated, it must establish that Foundation waived its right to require timely, prompt payments. The court further noted that a waiver constitutes an intentional relinquishment of a known right that may be inferred from the party’s conduct. As a general rule (and citing cases from other jurisdictions), the court held that acceptance of late payments could effect a waiver of the right to require prompt payments and a waiver of the right to accelerate.

The court concluded that the course of dealing established in this case (noting that late payments were provided and accepted 70 percent of the time over the history of the note) evidences that Foundation waived its right to require a prompt payment. Moreover, because CTP reasonably relied on Foundation’s acceptance of late payments without exercise of an acceleration clause, any change in that course of conduct would detrimentally harm CTP.

Nevertheless, the court gave Foundation some hope of resurrecting the express terms of the note. The court noted that Foundation could withdraw its waiver and begin requiring CTP to make payments in accordance with the express terms of the note. Foundation could simply provide a written notice of this requirement, and then CTP would need to make payments pursuant to the express terms of the note without any lateness in order to avoid a future acceleration. This case suggests that ongoing acceptance of late payments may have a detrimental effect on a lender’s right to exercise the terms of an agreement. Therefore, it is imperative that lenders preserve the express terms of their notes to preserve collection proceedings. However, in the event that late payments are accepted by a lender, the lender can withdraw the waiver. By requiring prompt payment for future payments, the lender can resurrect the prompt payment provisions of the note and reserve an acceleration right for future late payments.