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Promissory Note

Word of the day

Promissory Note

An unconditional written promise of one person to pay a certain sum of money to another, or order, or bearer, at a future specified time. The words or order or or bearer are important to make the instrument negotiable because these words enable the instrument to be endorsed and transferred. If it is negotiable, the maker should be sure to execute and sign only one note and not any copies. The maker usually initials any copies. The Uniform Commercial Code sets the standards for drafting an enforceable and negotiable promissory note.

A broker who accepts a promissory note as a deposit from a prospective purchaser must generally disclose to the seller that the buyer’s deposit is in the form of a promissory note. The broker who does not inform the seller risks license suspension or revocation. This requirement stems from the agent’s common-law duty to inform the principal of all facts relating to the subject matter of the agency that would affect the principal’s interest. It is preferable that the broker accept a promissory note rather than a “hold check” (a check that the buyer instructs the broker to hold instead of cashing) or a postdated check. It is good practice to insert a clause in the note to the effect that the prevailing party in any dispute over the note is entitled to costs of collection, including attorney fees.

In real property financing, the promissory note, which is sometimes called the mortgage note, serves as evidence of the debt for which the mortgage on the property is the security. If the security is insufficient to cover the indebtedness, the holder of the note can obtain a deficiency judgment against the debtor for the balance unless the note is labeled a nonrecourse note.

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