When lending money to someone, it is important to consider how the debt that now exists between yourself, as the lender, and the other person, as the debtor (based on your advance of money) is going to be best protected from future disputes with the debtor or default by the debtor.

If you lend money to someone without any written evidence that outlines:

(i) The sum of money being advanced

(ii) The date of repayment for the debt

(iii) Other terms of the advance of money

(iv) The identity of the debtor that is to repay the debt

(v) The identity of yourself as the lender

(vi) The debtor’s written recognition of the debt as evidenced by their signature

you run the risk of the debtor mysteriously “forgetting” about the debt in its entirely, or the terms of the advance that were agreed upon. You will inevitably bring aggravation upon yourself as the lender for not taking the time to outline what your expectations and terms were for the money being advanced and when the money was supposed to be repaid. Rather than having to argue with the debtor after you advance money to them as to what the terms of the advance actually were, you as the lender sput to writing what your expectations and terms are for the money being advanced to the debtor.

A promissory note is a written, legally binding document that is between the very informal “IOU”, which is simply a debtor’s recognition in written form of a debt that they have to another individual, and a more formal loan contract, which would outline in greater detail than a promissory note agreement the terms of the advance, including, but not limited to, the lender’s right to recourse in the event of the debtor’s default on the advance of money and the loan contract could be secured against assets of the debtor that are specified by the lender within the loan contract.

The promissory note agreement should outline or address the following:

1) Who is the lender?

2) Who is the debtor?

3) What is the sum of money being advanced?

4) What is the date that the sum of money contemplated within the promissory note agreement is going to be advanced from the lender to the debtor? Will the advance of money be all at once on a set date or over multiple different dates? Will the amounts being advanced be in different amounts?

5) What is the repayment date? Is the repayment date after 1 year from the date of advance, 10 years? Is the repayment date upon demand by the lender? Are there installment dates for the debt to be repaid in multiple installments?

6) What are the fees associated with the advance of money? Will the lender be charging for “bounced cheques” of the debtor?

7) Is there interest on the sum of money being advanced? What is the interest rate? It is important for the lender to determine that any interest on a sum of money being advanced is based on a legal interest rate.

8) Is there collateral or additional consideration being provided by the debtor to the lender under the promissory note agreement that the promissory note will be secured against?

9) Other terms that are of importance to the lender.

The promissory note agreement should be dated and signed by both the lender and the debtor. Impartial witnesses, who are not friends or family of the debtor or lender, should also sign the promissory note agreement as witnesses to the signatures of the debtor and lender, who can later attest if needed that the lender or debtor signed and understood the terms of the promissory note agreement they entered into.

Ideally, the lender would require the debtor to obtain independent legal advice before signing the promissory note agreement so that it will be much more difficult later on for the debtor to assert that they did not understand the terms of the promissory note agreement before signing.

When it comes time for repayment of the sum of money that was advanced under a promissory note agreement, which could have been either on a fixed date, multiple installment dates or upon demand by the lender, it is important for the lender to quickly address and deal with a debtor that is delaying or refusing repayment to the lender. Under the Limitations Act, 2002, in Ontario, there is no obligation to require repayment within a certain time period under a promissory note agreement but once a repayment date has passed without repayment, or a demand has been made by the lender to the debtor to repay the sum of money advanced under a promissory note agreement and the debtor refuses to repay or is delaying the repayment, the lender has only two years from the day that the demand was made by the lender for repayment or the repayment date, as the case may be (and whichever being the earlier date) to collect the money that was advanced or to commence a legal action against the debtor to enforce the promissory note agreement. Otherwise, under the Limitations Act, 2002, in Ontario, the debt established between the lender and debtor under the promissory note agreement will be statute barred and unenforceable against the debtor after two years from the earliest date that the debtor should have repaid the debt.