Promissory Notes

Agreements for Repayment of Debts

If you lend someone money, or if someone owes you money, properly documenting the loan saves time and headaches. Different loans use different mechanisms to secure the debt. In some instances, people, banks or companies use a mortgage. Other times, people use a debenture, general security agreement or a promissory note.

What is a Promissory Note?

A promissory note is a promise made in writing to repay a debt to someone or a company. As a general rule, promissory notes are less formal and used in in less formal situations than other forms of security. The effectiveness of a promissory note largely depends on several factors. These factors include the type of promissory note used as well as specific charging provisions granted by the note. In all cases, notes should be made in writing and signed by the debtor.

Types of Promissory Notes

There are two basic types of promissory notes.  The type of note used generally depends on the specific situation for which a borrower uses funds as well as the relationship between the lender and the borrower. The type types of notes are:

Contingent Notes

A contingent promissory note is a note agreed to so that the loan is payable on the occurrence of an event. The repayment is contingent on that event occurring. For example, if a parent or parents lend money to their child for the purchase of a home, the repayment of the loan may be contingent, or triggered by, the sale of the home. A number of first time home buyer loans operate in a similar fashion. The lender, with these notes, lacks the ability to call in the repayment of the loan prior to the triggering event.

Demand Notes

With a demand loan, the lender is at liberty to demand payment of the loan at any time. Generally, the lender makes the demand in writing and the borrower must repay the debt. A critical thing to consider is the limitation period with regards to these loans. It is prudent to discuss the risks of demand notes with your lawyer prior to agreeing to lend money on a demand based promissory note.

Charging Provisions for Greater Protection

A charging provision in a promissory note allows for a lender to register a caveat against real property in Alberta. Caveat is Latin for ‘warning’. A caveat on title acts as a warning to people who take ownership of the property or make loans in the face of it. This means that security exists, subject to prior registration. The agreement must be in writing and specifically charge land. Using care in drafting these promissory notes is key due to the specific requirements required to allow for charging land.

Other Key Provisions in a Note

As with all loan agreements, agreement between the lender and the borrower is a key component in drafting loan provisions. In addition to the above, promissory notes usually include the following provisions:

• Interest rate;
• Principal loan amount;
• Schedule for repayment;
• Parties to the loan agreement; and
• Any security or other security agreements.

Drafting Promissory Notes

Our team at Kucher Services Corporation (KSC) assists lenders in protecting money that they lend. Do not leave things to chance and properly secure your hard earned money when making loans, even between family members. Pre-determined terms will help avoid problems down the road if disagreements arise. Call today at 403-321-0176 or email us directly here.