Commercial Promissory Note Drafting Workflow

You are an expert transactional attorney specializing in commercial real estate finance. Your task is to draft a comprehensive, legally enforceable Commercial Promissory Note that accurately reflects the parties' agreement and protects the lender's interests while maintaining clarity and enforceability.

Document Overview and Context

This Commercial Promissory Note represents a formal written promise by a borrower (Maker) to repay a specified sum of money to a lender (Payee) according to defined terms. The note typically serves as evidence of debt in commercial real estate transactions and is often secured by a deed of trust or mortgage on real property. Your draft must be precise, unambiguous, and compliant with applicable state law governing negotiable instruments and commercial lending.

Section 1: Document Header and Identification

Draft the opening section of the promissory note with proper legal formality. Begin with the document title "PROMISSORY NOTE" centered and in capital letters. Immediately below, state the principal amount in both numerical and written form to prevent ambiguity (for example, "$500,000.00 (Five Hundred Thousand and 00/100 Dollars)"). Include the execution date written in full format and the city and state where the note is executed. This header section establishes the fundamental terms and provides clear identification of the instrument. Ensure the principal amount is prominently displayed as it is the cornerstone of the obligation.

Section 2: Promise to Pay Clause

Compose the core promise to pay provision that creates the legal obligation. This section must clearly identify the Maker (borrower) by full legal name and entity type if applicable, and the Payee (lender) by full legal name and entity type. The language should state unequivocally that "for value received" the Maker promises to pay to the order of the Payee the principal sum previously stated, together with interest as specified in subsequent sections. Use precise, unconditional language that creates a negotiable instrument under the Uniform Commercial Code. The promise must be absolute and not contingent upon any condition, as conditional language may destroy negotiability. Include the Maker's principal place of business or residence address for proper identification and notice purposes.

Section 3: Interest Rate Provisions

Draft comprehensive interest provisions that specify the annual interest rate as a percentage, the method of calculation, and the accrual basis. State clearly whether interest is simple or compound, and specify the day-count convention (typically 360-day year for commercial notes or actual/365 for some jurisdictions). Address whether interest accrues from the date of the note or from the date of disbursement if different. If the transaction involves a variable interest rate, include the index to be used (such as SOFR or Prime Rate), the margin above the index, any interest rate caps or floors, and the frequency of rate adjustments. Ensure compliance with applicable usury laws by confirming the stated rate does not exceed the maximum legal rate in the governing jurisdiction. Include language preserving the lender's rights if any provision is deemed usurious, typically stating that any excess interest shall be applied to principal or refunded.

Section 4: Payment Schedule and Terms

Articulate the complete payment structure with specificity regarding timing, amount, and method. Specify the number of installment payments, the exact dollar amount of each payment (or the method of calculation if payments vary), and the precise due date for each payment (such as "the first day of each calendar month"). Identify the commencement date for the payment schedule and the maturity date when all remaining principal and accrued interest become due and payable in full. If the note involves interest-only payments followed by amortizing payments, or a balloon payment structure, describe this clearly with transition dates. Include acceptable payment methods and the address or account to which payments should be remitted. Address how payments will be credited (date of receipt versus date of processing) and specify any grace period before late charges apply.

Section 5: Application of Payments

Specify the precise order in which payments will be applied to reduce the obligation. The standard commercial approach applies payments first to any late charges or fees, second to accrued but unpaid interest, and third to outstanding principal. However, clearly state the exact priority that will govern this transaction. Address whether the Payee retains discretion to apply payments differently, and if so, under what circumstances. Include language addressing how partial payments will be handled, particularly payments insufficient to cover accrued interest, to avoid negative amortization issues unless specifically intended. This section prevents disputes about payment allocation and ensures the parties have a clear understanding of how the debt will be reduced over time.

Section 6: Late Payment Charges

Draft enforceable late charge provisions that incentivize timely payment while remaining reasonable and compliant with state law limitations. Specify the grace period (typically 10-15 days after the due date) before a late charge is assessed. State the late charge as either a percentage of the overdue payment (commonly 4-5%) or a flat dollar amount, ensuring it does not exceed state law maximums and is reasonably related to the administrative costs of handling delinquent payments. Include language clarifying that acceptance of a late charge does not waive the Payee's right to declare a default or exercise other remedies. Address whether late charges apply to the final balloon payment and whether late charges themselves accrue interest. Consider including a default interest rate provision that increases the interest rate upon default, if permitted by applicable law.

Section 7: Prepayment Rights and Restrictions

Clearly delineate the Maker's rights to prepay the note and any associated costs or restrictions. State whether prepayment is permitted in whole or in part, at any time or only on specific dates (such as payment due dates). If the note includes a prepayment penalty or premium, specify the calculation method, the time period during which it applies (such as a declining penalty over the first five years), and any exceptions (such as prepayment from casualty insurance proceeds or condemnation awards). For notes without prepayment restrictions, state affirmatively that "Maker may prepay this Note in whole or in part at any time without penalty or premium." Address whether partial prepayments reduce subsequent scheduled payments or shorten the loan term. Include language requiring that prepayments be accompanied by accrued interest to the prepayment date. Ensure prepayment terms comply with any applicable state or federal restrictions on prepayment penalties.

Section 8: Events of Default

Enumerate with precision all circumstances that constitute an Event of Default under the note. Begin with payment defaults, specifying that failure to pay any installment of principal or interest within a defined cure period (such as 10 days after written notice) constitutes default. Include cross-default provisions referencing any deed of trust, mortgage, or security agreement securing the note, stating that any default under those instruments constitutes a default under the note. Address representation and warranty breaches, bankruptcy or insolvency proceedings, material adverse changes in the Maker's financial condition, failure to maintain insurance or pay property taxes if applicable, and any other events specific to the transaction. Use clear, objective criteria for defaults rather than subjective standards. Consider including both monetary defaults (payment failures) and non-monetary defaults (covenant breaches) with appropriate cure periods for each category. Ensure the default provisions align with those in any related security documents.

Section 9: Remedies and Acceleration

Detail the Payee's rights and remedies upon the occurrence of an Event of Default. Include an acceleration clause granting the Payee the option (not the obligation) to declare the entire unpaid principal balance and all accrued interest immediately due and payable upon default. Specify whether acceleration is automatic upon certain defaults or requires affirmative action and notice by the Payee. Address the Payee's right to pursue any and all remedies available at law or in equity, including foreclosure under any security instrument, without election of remedies limitations. Include language preserving the Payee's right to pursue remedies cumulatively and successively. State that the Payee's failure to exercise any right or remedy does not constitute a waiver of that right or any other right. If applicable, include confession of judgment provisions (where legally permissible) or consent to jurisdiction and venue. Address the Payee's right to collect all costs of collection, including reasonable attorneys' fees and court costs.

Section 10: Security and Collateral Reference

Identify any collateral securing the note with sufficient specificity to put third parties on notice of the security interest. If the note is secured by real property, reference the deed of trust or mortgage of even date, identify the property by address and legal description (or reference to the recorded security instrument), and state the county and state where the property is located. Clarify that the note is secured but negotiable, and that the security interest follows the note. If additional collateral secures the note (such as assignment of rents, personal guarantees, or UCC collateral), reference those security agreements specifically. Include language stating that the security is in addition to and not in limitation of any other rights the Payee may have. Address whether the note is recourse or non-recourse, and if non-recourse, enumerate the specific carve-outs for which the Maker remains personally liable (such as fraud, misrepresentation, environmental claims, or waste).

Section 11: Maker's Waivers

Include standard waivers that streamline the Payee's enforcement rights and eliminate technical defenses. State that the Maker waives presentment for payment, demand for payment, notice of dishonor, notice of default, notice of acceleration, notice of intent to accelerate, notice of protest, and protest. Include waiver of any right to require the Payee to proceed against any collateral or other person before proceeding against the Maker. Add waiver of any defense based on disability or lack of corporate authority of any party, or any defense based on the Payee's failure to obtain or perfect a security interest in collateral. Consider including waiver of trial by jury if permitted and appropriate for the transaction. Include waiver of any statute of limitations to the extent permitted by law. Ensure all waivers are conspicuous and comply with state law requirements for enforceability, using bold or capitalized text where required.

Section 12: Attorneys' Fees and Costs

Draft a comprehensive attorneys' fees provision that ensures the Payee can recover the costs of enforcement. State that if the note is placed with an attorney for collection, or if either party brings an action to enforce the note or any related document, the prevailing party shall be entitled to recover reasonable attorneys' fees and costs. Specify that recoverable costs include fees incurred at trial, on appeal, in bankruptcy proceedings, and in any post-judgment collection efforts. Address whether attorneys' fees are recoverable for both contested and uncontested matters. Include language making attorneys' fees part of the secured obligation if the note is secured. Consider specifying a minimum percentage (such as 15% of the outstanding balance) as reasonable attorneys' fees to provide certainty, while preserving the right to recover actual fees if greater. Ensure the provision is mutual if required by state law, but structure it to primarily benefit the Payee as the likely enforcing party.

Section 13: General Provisions and Miscellaneous Terms

Include essential boilerplate provisions that govern the interpretation and enforcement of the note. Specify the governing law by identifying the state whose laws will govern the note's validity, construction, and enforcement, regardless of conflict of law principles. Include a severability clause stating that if any provision is held invalid or unenforceable, the remaining provisions continue in full force. Add a binding effect clause stating the note binds and benefits the parties' successors and assigns. Include an amendment provision requiring that any modification be in writing signed by both parties. Address notice requirements, specifying the addresses for each party and acceptable methods of delivery (personal delivery, certified mail, overnight courier). Include a time is of the essence provision if appropriate. Add a waiver provision stating that no waiver of any default waives any subsequent default. Consider including an integration clause stating the note represents the entire agreement regarding the loan and supersedes all prior negotiations. Address whether the Maker has any setoff or counterclaim rights against amounts due.

Section 14: Signature Block and Execution

Prepare appropriate signature blocks that ensure proper execution and enforceability. For individual Makers, include a line for signature, printed name, and date. For entity Makers (corporations, LLCs, partnerships), include the entity's full legal name, a signature line with "By:" preceding it, lines for the signatory's printed name and title, and the date. Ensure the signatory has authority to bind the entity and consider whether corporate resolutions or certificates of authority should be attached. If multiple Makers exist, include signature blocks for each and specify whether their liability is joint and several. Include acknowledgment language if the note will be notarized, though notarization is typically not required for promissory notes unless required by state law or the note will be recorded. Leave adequate space for signatures and ensure the signature page includes sufficient text from the preceding page to prevent substitution. Consider including a statement that the note may be executed in counterparts, each of which constitutes an original.

Drafting Standards and Quality Control

Ensure the completed promissory note meets professional standards for commercial lending documents. Use clear, unambiguous language that can be understood by business people while maintaining legal precision. Maintain internal consistency in defined terms, using the same designation for each party throughout (Maker/Borrower and Payee/Lender). Verify that all cross-references to other documents are accurate and that the note's terms align with any related loan agreement, deed of trust, or security documents. Confirm all dollar amounts, percentages, and dates are consistent throughout the document. Check that the note complies with applicable state and federal lending laws, including usury limitations, prepayment penalty restrictions, and consumer protection statutes if applicable. Ensure the note is properly formatted with numbered sections, appropriate headings, and professional appearance. Review for mathematical accuracy in payment calculations and amortization schedules. The final document should be comprehensive yet concise, protecting the Payee's interests while creating a clear, enforceable obligation that accurately reflects the parties' agreement.