Get it in writing! Promissory Note Basics

Read this article if you are thinking about personally loaning money to an individual or a business. If you are already lending money to someone, more than likely you have created a promissory note, even if it is not in writing. However, just because an agreement is in writing does not make it a valid and enforceable promissory note. Read below to for the required elements of a promissory note and how to satisfy them.

As stated above, an agreement does not have to be in writing in order to be legally enforceable, however; for obvious reasons, a written agreement is not only easier and quicker to enforce, it also serves as a way to clarify the obligations of all those involved. In order for a written agreement to be enforceable, it must contain certain requirements called, material terms.

The Parties: The first material term is a description of the parties entering into the agreement. There is no need to get over detailed with this term, a full name and address is likely enough to serve the purpose. The key thing to remember is that the parties must be apparent from a bare inspection of the written agreement. Avoid generalities such as “my neighbor,” or “my son.”

The Promise: This term is meant to state exactly what is being agreed upon. In other words, for a promissory note, the promise is to pay a sum of money. Avoid making alternative payment arrangements such as allowing the payor to mow your lawn or to give you his snow blower in lieu of payment. However, if there are any terms or conditions on repayment, make sure they are clearly stated and spelled out. The promise should also include a definitive date as to payment. Avoid leaving the date open ended such as, “when I shall demand it,” or “when he can afford to pay it.”

Amount Payable: Also known as a “sum certain” the amount payable term must clearly state the amount that is to be paid. If the price is going to include interest or appreciation, do the math now and figure out how much will be owed. Just like identifying the parties, the amount payable must be capable of being determined from the face of the instrument itself.

Signatures: Finally, have all the parties sign the agreement. You may include the signature of a witness or have the document notarized but those steps are not required.

Now that the agreement is in writing and all the parties know what is expected of them, it may be less likely that problems arise. However, if they do, you now have a legally enforceable promissory note. If you need assistance in drafting a promissory note, or enforcing a previously drafted promissory note, give us a call.