What goes into a vendor take-back promissory note for a business sale?

A vendor take-back note is the buyer’s written promise to pay the seller part of the price later. Section 176(1) of the federal Bills of Exchange Act defines a promissory note as an unconditional promise in writing, made by one person to another and signed by the maker. It must engage to pay, on demand or at a fixed or determinable future time, a sum certain in money to a specified person, to that person’s order or to bearer. This page is not a template. Have a lawyer draft the actual note.

The elements the Act names

Read section 176(1) as a checklist: the promise is in writing, it is unconditional, the maker signs, the sum is certain, the time is on demand or fixed or determinable, and payment is to, or to the order of, a specified person or to bearer. Section 176(2) adds that an instrument in the form of a note payable to the maker’s order is not a note unless the maker endorses it. Section 27(1) says a sum is still a sum certain if it is payable with interest, by stated instalments, by stated instalments with a provision that on default in any instalment the whole becomes due, or according to an indicated or ascertainable rate of exchange. Section 186(1) applies the Act’s provisions on bills to notes, with such modifications as the circumstances require, subject to Part IV and to the rest of section 186, which lists provisions on bills that do not apply to notes. Section 178 says a note is inchoate and incomplete until delivered to the payee or bearer.

Commercial terms to settle

BDC says that once the buyer and vendor agree on vendor financing, they can decide on mutually agreeable terms, including the amount, interest rate and payback period. Those terms belong in the note or the agreement beside it. Ask the lawyer how the note will refer to security, to ranking behind a bank loan, and to remedies on default. A share pledge is a separate topic.

Interest limits

Section 3 of the federal Interest Act says that when interest is payable by agreement or by law and no rate is fixed by either, the Act fixes the rate. Name the rate in the note so the question never arises. Section 4, except as to mortgages on real property or hypothecs on immovables, limits interest made payable at a rate for a period shorter than a year unless the contract expressly states the equivalent yearly rate. Separately, section 347(1) of the Criminal Code makes it an offence, despite any other Act of Parliament, to enter or offer to enter into an agreement or arrangement to receive interest at a criminal rate, to advertise such an offer, or to receive a payment or partial payment of interest at a criminal rate. Section 347(2) defines both the criminal rate and what counts as interest, and section 347(8) excludes transactions to which the Tax Rebate Discounting Act applies. Have the lawyer check the rate and any default charges against both.

The glossary entry on the promissory note covers the plain-language meaning.