What Is a Promissory Note and When Should You Use One in Ontario?

If someone owes you money, or you are about to lend money to a friend, family member, or business contact, you may be thinking about how to put the arrangement in writing. A promissory note is one of the more common tools people in Ontario use to document a loan. It tends to be simpler than a full loan agreement, but depending on how it is written, it can still carry real legal weight.

Below, we look at what a promissory note usually covers, when people tend to use one, and why it may be worth having a lawyer review the note before any money changes hands.

What Is a Promissory Note?

A promissory note is generally a written promise from one person, the borrower, to pay a specific amount of money to another person or business, the lender, either by a certain date or according to an agreed repayment schedule. It is typically signed by the borrower, and depending on how the document is set up, the lender may sign it as well.

Promissory notes can range from a short, simple document to something more detailed that starts to look like a full loan agreement. Depending on the facts, the level of detail that makes sense may depend on the amount involved and the relationship between the people signing it.

When People Tend to Use Promissory Notes

Promissory notes tend to come up in a few common situations, including a loan between family members or friends, a loan between businesses or business partners, payment for goods or services when full payment is not made upfront, and cases where an existing debt is being put into writing after the fact.

In some cases, a promissory note is also used alongside another document, such as a purchase agreement or a shareholder arrangement, to record a related loan between the parties.

What a Promissory Note May Include

While the exact content can vary, a promissory note generally sets out the amount being loaned, the names of the borrower and the lender, the repayment schedule, whether that is a lump sum, instalments, or payment on demand, whether interest applies and how it is calculated, what happens if a payment is missed, and whether the note is secured against any property or unsecured.

The more specific these terms are, the less room there may be for disagreement later about what was actually agreed to.

Interest May Apply, Depending on the Agreement

Some promissory notes are interest free, which is common between family members or friends. Others include an interest rate, particularly in business lending situations. When interest is included, the note should generally set out the rate clearly and explain how it is calculated, since unclear wording can lead to disputes about how much is actually owed.

Depending on the facts, there may also be limits under federal law on the maximum interest rate that can be charged, so this is generally worth checking before the terms are finalized.

What Happens If the Borrower Defaults

A promissory note should generally address what happens if the borrower misses a payment or fails to repay the loan as agreed. This may include a grace period, late charges, or a term stating that the full remaining balance becomes due immediately if a payment is missed.

If a borrower does default, the lender's options may depend on the facts and can include sending a formal demand for payment or, in some cases, pursuing the matter through the courts. Having a clearly written note in place from the start can make this process more straightforward if a dispute comes up later.

Using a Promissory Note to Document Money Already Owed

Even outside of a brand new loan, a promissory note can sometimes be used to formally document an existing debt, for example, where money was lent informally in the past and both sides now want something in writing. Doing this may help avoid confusion later about how much is owed and when it is due.

That said, a promissory note is generally only as useful as how clearly it is written. Vague or incomplete terms may leave room for different interpretations if a disagreement comes up down the road.

Final Thoughts

A promissory note can be a useful way to document a loan and set clear expectations between a borrower and a lender. Depending on the facts, the right level of detail can vary quite a bit, from a short note between family members to a more detailed document for a business loan.

Because the specific wording can affect how enforceable a note is and what happens if something goes wrong, it is generally a good idea to have a lawyer review a promissory note before it is signed, particularly for larger amounts or more complex arrangements.

Frequently Asked Questions

Q: Is a promissory note legally binding in Ontario?

A: In many cases, yes, provided it is properly drafted and signed. Whether a specific note is enforceable can depend on how it is worded and the circumstances involved, so it is generally worth having a lawyer review the document.

Q: Does a promissory note need to include interest?

A: No, a promissory note can be interest free, and this is common between family members or friends. If interest is included, the note should generally set out the rate and how it is calculated, and there may be legal limits on the interest rate that can be charged.

Q: What happens if the borrower does not pay back a promissory note?

A: This depends on the terms of the note and the specific facts. In some cases, the lender may send a formal demand for payment, and in others, the matter may need to go through the courts. Reviewing the note with a lawyer can help clarify the options.

Q: Can a promissory note be used to document money that was already lent?

A: In some cases, yes. A promissory note can sometimes be used after the fact to put an existing informal loan in writing. Depending on the facts, this may help avoid confusion about the amount owed and the repayment terms.

Contact DevLaws

If you are lending or borrowing money and want to document the arrangement properly, the team at DevLaws can help you understand what a promissory note may need to include for your situation. Contact DevLaws today to schedule a consultation.

contact@devlaws.com | +1 437 290 0424 | devlaws.com

Disclaimer

This article is provided for general information purposes only and does not constitute legal advice. It is not intended to create a lawyer-client relationship. Laws and regulations can change, and the information here may not reflect the most current developments. Every situation is different, and the information in this article may not apply to your specific circumstances. If you are considering using a promissory note, you should speak with a qualified lawyer for advice tailored to your situation. DevLaws does not guarantee any particular outcome or result.