Promissory Notes

A Promissory Note is a legally binding promise to pay. They are also known as IOUs or demand notes.  A Promissory Note sets out the amount owed, the interest rate (if applicable), the date the note was written and signed by the parties, and the date that the amount owed must be repaid.

Regardless of who you are lending money to, it is crucial to have a written Promissory Note in place. This is because verbal agreements are often difficult to enforce. Having a signed and clearly written Promissory Note will ensure that you are not left guessing about when the debt will be repaid. More importantly, having a Promissory Note will ensure that you will have legal remedies in case things take a turn for the worse.

Here are the key elements that should be included in every Promissory Note:

• Effective date
• Parties
• Loan amount
• Loan payment terms and repayment schedule (e.g., lump sum payments or monthly payments)
• Interest rate and frequency (if applicable)

The Promissory Note should also detail the consequences in the event of a default and whether the note can be cancelled, amended, or assigned to someone else.

When lending money to family members (e.g., spouse or children), special considerations apply that make it very important to have a Promissory Note in place. First, the presumption of advancement may apply. This means that it is presumed that the amount transferred is a gift. The court has provided a number of factors to help determine whether an advancement of money is a gift or a loan. Some of these factors include whether there are documents evidencing a loan, whether there is security (collateral) held for the loan, whether the manner for repayment is specified, and whether there is an expectation or likelihood of repayment. As such, it is crucial to have a Promissory Note signed if you intend to be repaid. Otherwise, it may be presumed to be a gift.

Another reason why it is important to have a Promissory Note when lending money to family members is because there is a presumption that there is no intention to create legal relations between family members. Courts have historically assumed that family members do not intend to create legal relations between one another. If there is no intention to create legal relations, then there is no contract. If there is no contract, then nothing can be enforced. As such, a Promissory Note is needed to overcome this presumption. This agreement demonstrates that there is indeed an intention to create legal relations and that the borrower is aware of potential legal consequences upon default.

A lender can choose whether or not they wish to charge interest. If they do decide to charge interest, then they should be aware of the Criminal Code prohibitions against charging a criminal rate of interest. In Canada. it is an offence to enter into an agreement to receive interest at a criminal rate. A “criminal rate” is one in which the annual percentage rate exceeds 60%. This is determined by taking into consideration all related fees, fines, and charges associated with the agreement. Therefore, careful consideration should be paid to how much interest to legally charge.

Moreover, there may be tax consequences to the lender for the interest income they receive.

Promissory Notes are very similar to Loan Agreements aside from a few differences. First, Promissory Notes are typically shorter and less formal. Second, both the borrower and the lender sign a Loan Agreement whereas in a Promissory Note, typically only the borrower signs. This means that there is no obligation for the lender to do anything in a Promissory Note.

For small loan amounts and more informal relationships, we recommend going with a Promissory Note. For larger loan amounts and more sophisticated business relationships, we recommend going with a Loan Agreement.

It is important to figure out how you will recover your money if the borrower defaults on the loan. Collateral refers to assets pledged by the borrower that the lender can seize and sell to recoup their losses if the loan is not repaid according to the terms of the Promissory Note.

In the absence of collateral, if a borrower defaults, the lender must take the borrower to court. This process can be lengthy and complex, and there is no guarantee that the lender will be able to recover all of their losses.

Taking collateral for a note provides the lender with a significant advantage in the event of default. By seizing and selling the collateral, the lender can recover their losses more quickly and efficiently.

The decision of whether or not to take collateral for a note depends on a number of factors, including the value of the amount owing and the type of assets that the borrower is willing to pledge as collateral.

Although this is not required, notarizing your Promissory Note is an effective way to verify the signatures and identities of the parties involved in the Promissory Note. Another option is to sign the Promissory Note in front of a witness. In this case, the witness should be a neutral third party.

There are several steps that can be taken to enforce a Promissory Note if the borrower defaults on payment.

These are general recommended steps and the exact steps that you should take may be different. Specifically, the way in which you enforce a Promissory Note will often depend on the terms of the agreement and your jurisdiction. For example, the Promissory Note may have an alternative dispute resolution clause which obligates the parties to resolve their issues through arbitration or mediation instead of going to court. Consult with a lawyer to ensure that you’re handling the breach in a way that maximizes your chances of success.

When it comes to Promissory Notes, it is a good idea to have it drafted or reviewed by a lawyer. A lawyer will ensure that your legal needs are protected. They will raise awareness to any blind spots you may have.

For example, they may recommend clauses that protect you in ways that you would not have otherwise thought of. Or help you truly understand what you are getting into.