What is a Promissory Note in the UK?

As a business owner, you may come across a promissory note in certain types of agreements. These commonly arise in relation to certain types of loan agreements. In short, promissory notes are a legal instrument where one party promises to pay another party. Promissory notes are bound to a set amount of money and specific terms and conditions. Promissory notes are different from a simple spoken or written promise because they contain specific, formal information.

This article will elaborate on some of the key features and requirements of a promissory note. It will also touch on when you can use one, and key considerations when doing so.

What is a Promissory Note?

A promissory note is an unconditional promise to pay a specified person a certain amount of money to another. A specific set of terms will bind this promise.

Historically, promissory notes developed before official banknotes. 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.

Sum certain or loan amount

First, the amount of money due as part of a promissory note must be a ‘sum certain’. The Bills of Exchange Act 1882 , which governs the rules around promissory notes, outlines this rule. 

In practice, this means that the promissory note must account for an amount of money that is:

• specific;
• certain; and
• clearly ascertainable.

Further, terms of the note could couple this payable amount with an interest rate, alongside conditions for repayment in certain intervals.

Negotiability

A promissory note must act as a ‘negotiable instrument’. This comes with two key implications, such that:

• the title (i.e. ownership) of the promissory note can be freely transferred to other people. Transferring a note in this way is called ‘negotiating’ the note; and
• a promissory note which has been transferred to a new holder will mean that the new holder holds the note with legitimate rights and obligations. 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 either party should be able to transfer a promissory note.

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.

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 is inherent.

When 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