Promissory Note

What is a promissory note?

A promissory note can be used to confirm the details of a simple loan between individuals or corporate entities in the United Kingdom. It acts as an 'I owe You' (IOU) and constitutes a promise for a borrower to make payment.

What is the difference between a promissory note and a loan agreement?

A promissory note is a simplistic note which is signed by a borrower (the person or entity borrowing the money). It is typically used in less complex and less formal situations, in order to confirm that the relevant loan amount will be repaid. Promissory notes are often used between friends and family members. The loan under a promissory note can usually be transferred to another third party.

A loan agreement is a formal contractual document which will be signed by both the borrower and the lender. The loan cannot usually be transferred to another third party. A loan agreement can include more detailed information about the details of a loan as:

• a guarantee - made by a third party guarantor who will agree to pay the loan if it is not repaid on time
• detailed terms to address the event of default and pre-payment
• any warranties - promises and assurances made by the borrower as part of the agreement

Is it mandatory to have a promissory note?

No. A party can agree to lend another party money informally, without any written documentation. However, it is helpful to have a promissory note to set out the basic details of the loan amount and the agreement about repayment. This can be helpful evidence of the contractual agreement in the event of any future dispute

Who can enter into a promissory note?

The lender and borrower can be a:

• natural person who is over the age of 18 and has full legal capacity (meaning they have the ability to make and understand decisions)
• legal corporate entity (such as a company or Limited Liability Partnership).

It is also possible to have multiple borrowers in the agreement who are jointly responsible for the repayment of the loan.

What the duration of a promissory note be?

A promissory note is designed to remain in place until a loan is repaid. The parties can agree that the loan will be repaid by:

• instalments over a set period of time
• a lump sum on a specified date
• on future written demand of the lender

What should be done once the promissory note is ready?

Once the borrower has signed the promissory note, the parties should retain a signed copy of this. The borrower should make repayments in accordance with the agreement.

What happens if a borrower does not adhere to the terms of a promissory note?

If the loan is not repaid in time, or if any payments due are missed. The lender may wish to send a letter of demand.

If amounts remain unpaid following a letter of demand, the lender might wish to send a formal warning notice that the contractual agreement has been breached. If the matter remains unsolved, the lender may wish to send a letter before claim or a letter of intention to start the simple procedure in Scotland before then instigating court proceedings.

What should be included in a promissory note?

A promissory note should:

• Identify the parties - the lender and the borrower
• include a promise from the borrower - to repay the loan
• confirm repayment terms - the schedule or date for repayment
• Confirm the details of any collateral – any assets which are promised as security over the loan. If the loan is not repaid in time, the lender may seize those assets.

What laws apply to a promissory note?

The law applicable to Promissory Notes in the United Kingdom can be found in The Bills of Exchange Act 1882.

The general laws of contract will also apply.

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