Validity of Promissory Notes Drawn Up Between Contractors and Homeowners in the Construction Sector and Problems Encountered in Practice

In Turkey, alongside classic sales contracts and bank loans, one of the most frequently used methods for purchasing residential and commercial properties is payment by promissory note . Especially in urban transformation projects, construction projects in exchange for land, and off-plan apartment sales, promissory notes are issued between the contractor and the homeowner (either the landowner or the apartment buyer). These notes sometimes secure the sale price, sometimes the payment due, and sometimes simply serve as collateral.

However, in practice;

• Having someone sign a blank or high-value promissory note,

• Putting the promissory notes into collection before the construction is completed and the title deed is transferred,

• Using promissory notes claimed to be collateral as if they were the actual debt instruments,

• The misuse of promissory notes obtained from consumers to circumvent consumer rights

Many problems like these are encountered. In this article, the legal validity of promissory notes drawn up between contractors and homeowners, the types of promissory notes, and frequently encountered disputes in practice; within the framework of construction contracts, sales contracts, and consumer law.

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1. The Legal Nature of the Contractor-Landlord Relationship: Is it a Work or a Sale?

In construction projects, the relationship between the parties often involves both a construction contract and a sales contract

• Construction contract in exchange for land: This contract is signed between the landowner and the contractor. The landowner gives a "share of the land" and receives a certain number of independent units (apartments, shops) in return.

• Pre-paid housing sales contract / off-plan sale: This is established between the contractor and the apartment buyer (often the consumer). The apartment is not yet completed, the buyer pays the price in installments, and the contractor undertakes to deliver it within a specified period.

In these relationships, the promissory note typically consists of:

• Sales/price promissory note (showing the installments of the apartment price directly),

• Payment certificate (a document that a contractor will receive from the landowner in exchange for the work completed),

• Promissory note (taken as security against breach of contract, defective workmanship, expenses, etc.)

They are drawn up for various purposes. The legal nature of the promissory note is determined by the underlying debt relationship

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2. General Conditions for the Validity of the Document

For promissory notes related to the contractor-landlord relationship to be considered valid, meet the general requirements . Regarding promissory notes:

• The text of the document includes an expression indicating whether it is a "promissory note" or a bill of exchange payable to order

• An unconditional promise to pay a specific sum of money

• Identifying the beneficiary (creditor) and the debtor

• Date and place of arrangement,

• Debtor's signature

The following essential elements must be present. If the formal requirements are met, the promissory note generally of a negotiable instrument and provides the creditor of enforcement proceedings through negotiability .

However, this does not mean that the promissory note is undeniably valid in favor of the creditor in every case . In the context of contracts in the construction sector, the underlying debt relationship behind the note , as well as issues such as defective performance, incomplete performance, delivery, and transfer of title, are also extremely important.

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3. Most Commonly Used Promissory Note Types in the Construction Sector

3.1. Sales Price Notes (Installment Notes)

When a contractor sells an apartment based on a model, they often ask the buyer for:

• Down payment,

• Bank loan,

• for the remaining amount, arranged .

These promissory notes represent the direct sale price . The apartment owner completes the payment as they make installment payments. The important thing to note here is:

• The promissory notes must be consistent with the payment schedule and the contract

• Promissory notes should not be issued for amounts exceeding the value under the guise of "collateral,"

• The key is to balance the progress of construction with installment payments.

In cases of defective workmanship, delivery delays, or faulty performance, the buyer may assert their contractual rights and make demands such as price reductions , refusal of performance , and compensation regarding the promissory notes

3.2. Payment Certificates

In construction contracts based on a share of the completed building, the contractor may obtain promissory notes from the landowner to secure the payments due. For example:

• The landowner issues a promissory note to the contractor in exchange for the completion of a specific construction project

• The promissory note amount corresponds to the value of the independent units that the contractor will deliver.

Here, the validity of the promissory note is largely up for debate, depending on whether the contractor fulfills the workmanship commitments . The landowner can claim that the promissory note has become worthless by alleging that the contractor has failed to fulfill their commitments

3.3. Security Notes

Another common practice is taking out promissory notes. For example:

• The landowner obtains a promissory note from the contractor as a guarantee for "delivery according to the project, occupancy permit, and completion of common areas."

• The contractor requests a promissory note from the buyer as collateral for potential items such as "dues, common expenses, management costs, VAT differences, and extra manufacturing costs.".

Documents classified as collateral that secure the underlying debt relationship . If the underlying debt relationship never arises or is completely terminated, the collateral worthless . If enforcement proceedings are initiated based on a worthless document, the debtor can invoke this fact.

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4. Most Common Problems Encountered in Practice

4.1. Obtaining Signatures on Blank or High-Value Promissory Notes

Especially in sales based on models, contractors sometimes say:

• They are having people sign promissory notes by leaving elements such as the amount and due date blank,

• Or they issue promissory notes for exorbitant amounts that are disproportionate to the sale price.

These promissory notes can later unspecified amounts and put up for collection; even if the apartment buyer states that they "signed it merely as a formality," they can suffer serious hardship under the weight of bill of exchange collection proceedings.

In this case, the buyer;

• The promissory note was given as collateral,

• It was found to be blank or filled in without authorization,

• The underlying debt relationship either never came into being or was incomplete

By providing proof, lack of payment, unauthorized filling, and unfair terms .

4.2. Putting the Promissory Note into Collection Before Construction is Completed and Handover Takes Place

One of the most common disputes is when the contractor:

• Failure to complete the construction within the timeframe stipulated in the contract,

• If the seller wants to deliver the product with incomplete or defective workmanship,

• Nevertheless, he put the promissory notes into execution on their due date.

However, as a rule in a contract for work/sales:

• The buyer's obligation to pay and the contractor's obligation to deliver/perform the work are linked.

• If there are serious defects or deficiencies, the buyer is not obligated to pay the full price; they may exercise their rights such as a price reduction, postponement of performance, compensation for defective performance, or termination of the contract.

Although the promissory note may seem abstract in this context , the buyer can defend themselves against enforcement proceedings by raising defenses arising from the underlying relationship ; if necessary, they can file a negative declaratory action , and if they have already paid, they can demand restitution .

4.3. Unfair Terms and Information Issues in Consumer Transactions

The apartment buyer is often a consumer . In consumer transactions:

• Transparency, open information,

• Prohibition of unfair terms,

• The principle of interpretation in favor of the consumer

It is valid.

The contractor's;

• The fact that the price of the house was not explicitly stated in the contract, and was relied upon only through promissory notes,

• Failure to inform the consumer about what the promissory notes represent,

• Taking excessively high-value promissory notes as a "formality"

From the consumer's perspective, an unfair term and a serious imbalance . In this case, even if the promissory note is deemed entirely valid, the consumer can raise strong defenses against the creditor within the framework of the underlying relationship.

4.4. The Grievances of Landowners in Construction Projects Based on Share of Land

In construction contracts based on land exchange agreements, it is quite common for landowners to suffer losses due to promissory notes. For example:

• The contractor obtains additional promissory notes from the landowner to cover the risk of termination or claims of additional construction work

• They go bankrupt or abandon the construction before completing the project,

• Nevertheless, he endorses the promissory notes he holds to third parties or initiates collection proceedings.

Although the landowner has the right to terminate the contract or claim compensation due to the contractor's serious breach of contract, the creditor of the promissory note can initiate enforcement proceedings using the strong enforcement possibilities provided by commercial law. At this point, the landowner;

• The promissory note is a security note,

• The underlying contract has been terminated

• The contractor failed to fulfill his obligations

They will have to wage a legal battle, presenting the evidence they have to claim.

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5. Practical Suggestions for Contractors and Homeowners

5.1. Not to Issue a Promissory Note Without a Written and Detailed Agreement

The most basic rule for both the contractor and the homeowner is this:

• A promissory note alone does not constitute a contract for a construction relationship.

• First, a comprehensive, dated, and signed contract must be drawn up;

• The contract must clearly state which debt each promissory note represents.

The contract must include:

• The total cost,

• Payment plan,

• Number and amounts of promissory notes,

• If there is a security bond, the phrase "security bond" must be clearly stated

• Delivery time, occupancy permit, title transfer conditions,

• Provisions to be applied in case of defects, incomplete workmanship, or delays

It should be included.

5.2. Avoiding Signing Blank Promissory Notes

The parties involved, especially consumers, absolutely avoid signing blank promissory notes . Notes signed with fields such as amount, maturity date, issuance date, and payee left blank are the most vulnerable documents to later misuse.

5.3. Limiting the Use of Security Notes

If a security bond is to be obtained:

• The phrase "guarantee note" should be written on the note .

• It must be clearly stated which contract or debt it secures

• The maximum amount of the security deposit and the conditions under which it can be used should be stated in the contract.

This will increase the probative value in future "gratuitous promissory note" disputes and make arbitrary use more difficult.

5.4. Payments Must Be Made Through Bank Channels and with Detailed Information

As much as possible:

• Payments are made through the bank

• The EFT/Wire Transfer description should include information such as the independent unit number, contract date, and promissory note number

This significantly reduces the burden of proof for the parties in the future.

5.5. Attention to Time Limits in Case of Dispute

When faced with debt collection proceedings based on a promissory note:

• In foreign exchange proceedings, the objection/complaint periods are very short

• Legal action must be taken within the prescribed time limits after receiving the notification.

Otherwise, the promissory note becomes final in the enforcement proceedings, making it much more difficult and costly to later defend against it based on the underlying relationship.

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Conclusion

In the construction industry, promissory notes drawn up between contractors and homeowners can secure the relationship between the parties when properly structured; however, when misused or used maliciously, they can lead to serious losses for landowners, apartment buyers, and contractors alike.

Validity of promissory notes;

• Compliance with the formal requirements as a negotiable instrument ,

• Provided that the underlying debt relationship has been lawful and actually fulfilled,

• To establish a fair, transparent and reasonable balance between the parties.

It depends.

Because;

• Neither contractors nor anyone else can afford to be complacent thinking, "I have the promissory note anyway."

• Nor should homeowners/landowners become complacent thinking, "I'll get my apartment eventually.".

Both parties should carefully review the contract, price, delivery terms, and security provisions before signing, and seek legal assistance if necessary. This is the most effective way to prevent serious disputes in the future.