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Other terms may be added based upon the requirements of and negotiation
between the parties involved. These optional terms are briefly discussed
below:
ACCELERATION UPON DEFAULT
This term provides that the lender (payee) may call the entire loan due
and payable immediately if the borrower defaults. The term "default"
is explained below.
EXAMPLE: Let's say Joe borrowed $1000 from Bob for 1 year with monthly
installments of principal and interest. If Joe failed to make the 3rd
month's installment payment (a default situation), Bob would have the
right to demand that Joe pay immediately any remaining amounts of principal
and interest due under the promissory note, which amounts would include
whatever interest had accrued on the principal up to the date of acceleration
(the date Bob demands all his money back). Amounts due pursuant to acceleration
cannot include a prepayment premium or unearned interest. As part of
the agreement to accelerate, the borrower waives presentment or notice
of dishonor, both of which are conditions to an indorser's liability
(explained more below).
EVENTS OF DEFAULT
This term explains when a situation is considered a default. It is required
if another term in the note depends upon a default situation. Of course,
like many other terms of a promissory note, defining a situation of default
is open to negotiation between the parties. A lender wants to define a
default as broadly as possible. A borrower, on the other hand, wants to
define a default as narrowly as possible. The events below are choices
(except the first one which is always a default event) provided by the
that the parties may decide to include or exclude as an event of default.
1) Borrower fails to make any payment or pay any obligation when due under
this promissory note.
2) Borrower becomes insolvent.
3) Borrower files a voluntary bankruptcy petition, or an involuntary petition
is filed against borrower.
4) Borrower makes a general assignment for the benefit of creditors.
5) Lender or holder discovers that a misrepresentation was made to lender
by borrower or on borrower's behalf, and, absent such misrepresentation,
lender would not have entered into the transaction reflected by this note.
LENDER'S RIGHTS AND REMEDIES
Usually, lenders insist on including certain terms designed to protect
their interests. The
allows the parties to include or exclude any one or all of the following
3 terms.
1. A term providing that the lender does not give up any of his or her
rights just because he or she does not feel like exercising them at any
given time. For example, if a late fee is due one month, but the lender
decides to be nice and not enforce his right to the late fee that month,
it does not mean that the lender gives up the right to demand a late fee
the next time the borrower is late in making an installment payment.
2. A term providing that all of the lenders rights (if more than one)
are cumulative. This means that they can be exercised all together, and
pursuing one remedy does not prevent pursuing another.
3. A term providing that any waiver by the lender of any right, or any
change to the promissory note, must be in writing and signed by the lender.
LATE CHARGE
This term provides that if the borrower is late on a payment, he must
pay a fee to the lender. This is intended to encourage the borrower to
be punctual with payments. It also compensates the lender for lost use
of time of money and any administrative tasks that may be required to
handle late receipt of money. If a late charge term is included, the parties
must decide how many days must pass before a payment is actually late,
and what the amount of the late charge will be. Late charges must be reasonable
(See California
Civil Code section 1671), and are usually expressed as a percentage
of the payment amount that is late.
ATTORNEY'S FEES AND COLLECTION COSTS
This term provides that if litigation is commenced to enforce rights under
the promissory note, the prevailing party (the party in whose favor the
court rules) can recover from the other party the money he/she spent for
attorneys and other costs. Generally, each party pays for their own attorney.
However, if the parties agree to this type of term (or there exists a
statute allowing recovery for attorney fees as is the case for certain
types of actions), the default legal rule will be changed.
WAIVER OF PRESENTMENT AND NOTICE OF DISHONOR
"Presentment" and "Notice of Dishonor" are concepts
defined in California
Commercial Code sections 3501-3505. These concepts are best understood
in the context of a sale of a promissory note to a 3rd party buyer. The
buyer has the right to enforce the promissory note against the original
borrower as well as the original lender (also known as the "indorser"
- California
Commercial Code section 3204). However, if the original borrower defaults,
the indorser is not liable until the buyer demands to get paid (known
as presentment), does not get paid (known as dishonor), and the indorser
receives notice that the buyer has not been paid (known as notice of dishonor).
If, however, the borrower and all indorsers waive presentment and notice
of dishonor, then the buyer need not worry about these technical requirements
to enforce his rights under the promissory note.
NOTE: If acceleration
upon default is allowed, these waivers will automatically be included
in the promissory note.
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cannot and does not practice law and cannot help you with your individual
problem.