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A promissory note is an instrument by which a debtor promises to pay a certain amount of money to a creditor. These notes are useful when the debtor is making payments on a set schedule rather than one lump-sum payment. Promissory notes govern the terms by which the debt is repaid: they set dates for and amounts of principal payments in addition to establishing interest rates and dictating other terms of payment.
When are promissory notes used?
Parties to promissory notes may be individuals, entities, or a combination of the two. Whether the borrower is an individual purchasing real estate, a developer developing property, or a corporation purchasing shares from a shareholder, a promissory note provides the lender with evidence of the borrower's pledge to repay the money borrowed. Many buy-sell agreements enumerate requirements governing promissory notes in the event that a shareholder's shares are purchased by the corporation or other shareholders (or, in the case of an LLC, in the event that a member's interests are purchased by the company or other members).
What provisions do promissory notes include?
In addition to determining the interest rate of the repayment, promissory notes often include provisions concerning prepayments, late payments, and events of default, among others.
California law establishes statutory minimums and maximums for interest rates. The relevant limitations depend on the intended use of the borrowed funds. Whether you are a borrower or a lender, you need an effective attorney to negotiate an interest rate that is most advantageous to you.
Parties can agree to allow or disallow prepayments, and such prepayments may incur premiums or penalties, depending on the understanding of the parties. Your interests in the underlying deal will shape the guidelines that are most beneficial to you.
Debtors and lenders alike may want to plan for worst-case scenarios, such as when a payment is missed. Allowing for late payments or other curing methods can have advantages to both sides. Parties can determine whether late fees or other penalties will be imposed in the case of a late payments.
Events of Default:
A promissory note constitutes an agreement between two parties, and a breach of that agreement by either side may give rise to an event of default. Provisions concerning defaults may allow for grace periods, new guidelines that become effective upon an event of default, or other remedies for the non-defaulting party. An experienced attorney like the attorneys at White and Bright can effectively carve out the provisions that will best promote your interests.
Constructing a Strategic Promissory Note.
Promissory notes can be written in a number of ways. They might cause an asset to be pledged as security, or they might require an indebted party to sign a personal guaranty. Promissory notes can limit or expand the remedies available to a party. Ensuring that complies with all legal requirements can mean the difference between an enforceable promissory note and an unrecoverable debt.
Sophisticated parties know how important it is to plan for all scenarios. No matter the motivation behind the decision to borrow or magnitude of the funds being borrowed, we carefully craft our promissory notes to ensure that each client's interests are protected and promoted. Our meticulous attention to detail and comprehensive understanding of the potential provisions allow us to shape sound, strategic promissory notes and to thoroughly review and effectively negotiate notes written by opposing parties. Please reach out to us to discuss how we can advise and assist you with your promissory note.
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