In Short
-
A promissory note is a formal, unconditional promise to pay a specified sum of money under agreed terms.
-
It must include a clear sum, be negotiable, and signed by the issuer.
-
Commonly used for loans, including business, student and personal loans.
Tips for Businesses
When using promissory notes, ensure they clearly state the loan amount, repayment terms, and any interest rates. Remember, these notes are legally binding and enforceable in court. For complex agreements or substantial sums, consult a legal professional to ensure the note meets all legal requirements and protects your interests.
As a business owner, you may encounter a promissory note in certain types of agreements or as a standalone document. These commonly arise when a person or company unilaterally promise to pay a sum of money. In short, promissory notes are a formal legal document in which one party promises to pay another a sum of money. You may encounter a promissory note in certain types of agreements or as a standalone document. These notes typically arise when a person or company unilaterally promises to pay a sum of money. In short, a promissory note is a formal legal document in which one party agrees to pay another a specific sum of money.
This article will elaborate on some of the key features and requirements of a promissory note. It will also cover when you can use one and key considerations to keep in mind when doing so.
What is a Promissory Note?
A promissory note is an unconditional promise to pay a set sum of money. A specific set of terms will outline how and when the payment must be made.
Historically, promissory notes developed before official banknotes were introduced. This is because they were more convenient than carrying around coins.
Features and Requirements of a Promissory Note
To create a valid promissory note, your note must meet certain requirements as set out in section 83(1) of the Bills of Exchange Act 1882 (1882 Act). We will set out some of these conditions below.
Sum certain or loan amount
First, the promissory note must contain an unconditional promise for the payment of a ‘sum certain in money’. In practice, this means that the promissory note must specify a specific, certain, and clearly ascertainable amount of money, and that the sum must appear on the face of the note.
Furthermore, the terms of the note could specify a payable amount with an interest rate, along with conditions for repayment at the agreed-upon intervals.
Negotiability
A promissory note must act as a ‘negotiable instrument’. This comes with two key implications, such that:
- ownership of the note can be transferred to someone else.. Transferring a note in this way is called ‘negotiating’ the note; and
- once transferred, the new holder has the same legal rights to payment as the original holder. This is the case provided that the note was not acquired with any defects of title. In other words, if it was acquired illegitimately, or the new holder is unaware of any defects of title, the above rights and obligations may not protect either party.
This means that a simple declaration that you owe another person (an IOU) is not necessarily a promissory note, because it may not be transferable in the same manner.
Must Be Unconditional
A promissory note must be unconditional. This means that if the note is subject to conditions (for example, if it contains the words ‘subject to delivery’), then it will not amount to a valid promissory note. It can, however, contain terms and conditions regarding the payment of the set amount.
This template refers to the minutes of the first meeting of the directors of a Company.
Execution and Consideration
Finally, for a note to be legally valid, it must contain the signature of the person who is creating the promissory note (sometimes referred to as the note’s issuer). It does not, however, have to contain the signature of the note holder (sometimes referred to as the note’s payee).
If there is no signature, the payee cannot bring legal action against the issuer, who has agreed to pay the set amount.
Further, courts assume promissory notes contain ‘consideration’. Consideration is a requirement in the general rules of contract law that each party has to give something of value to create a legally binding agreement. In the case of a promissory note, courts will assume consideration has been provided.
Continue reading this article below the formWhen Can You Use a Promissory Note?
Some common modern uses of a promissory note include:
- student loans;
- business loans;
- real estate loans;
- lending between family or friends for large sums of money, or even for a lump sum to be paid at a later time;
- to charge interest on a loan, including on a personal loan; and
- to outline repayment terms as part of loan terms.
Other Features of a Promissory Note
Importantly, either party can amend a promissory note so long as the note’s issuer and payee (as well as any other relevant parties) all agree.
Finally, the obligations under a note will also lapse at the note’s maturity date (in other words, when the amount under the note becomes payable).
Key Takeaways
As a business, you may wish to use a promissory note as a formal way of coming to an agreement with another party. Typically, business owners use promissory notes for certain types of loans. Promissory notes can also include interest rate terms.
Promissory notes have a number of requirements to be valid. One of these is that the note must be ‘negotiable’ – meaning that the note must be able to be transferable. As a result, a simple IOU will not amount to a promissory note for the purposes of the Bills of Exchange Act 1882, which governs UK law on promissory notes.
If you have any further questions regarding promissory notes, our experienced contract lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0808 196 8584 or visit our membership page.
Frequently Asked Questions
A promissory note is where one party agrees to pay another party a set amount of money under specific terms. A promissory note has a number of requirements.
Consideration is a requirement for contract formation in general UK contract law, and requires that both parties must exchange something of value.
An IOU is a simple note that says one person owes money to another. It typically displays the amount owed and the names of the individuals involved. It usually doesn’t include detailed repayment terms, interest, or legal wording.
We appreciate your feedback – your submission has been successfully received.
