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 Negotiable Notes

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Lorelei Stevens - President, Wall Street Brokers, Inc. Seattle, WA. RE Broker & discounted note buyer since 1970s. A 3rd generation family member specializing in the paper business. Legal CED instructor & author of many articles for professional publications.

 Law Controlling This Subject, The Uniform Commercial Code
Contains many complicated requirements that require expertise to comply with. We have that expertise, and will examine your note carefully to make sure we want to buy it.

We have learned a few simple things to guard against. You can check your note for the following problems that could make it non-negotiable.

 Your Note Must Be In Writing And It Must Be Signed
By the person who is buying the property from you. It must be the original and not a signed copy and it must be in your possession. Check to make sure of these vital points.

 Your Note Must Not Be Subject To Additional Performance
Beyond paying money. That means your note must not contain any other promises to fulfill, such as fixing the roof or performing maintenance chores or any other promise.

 Your Note Cannot Be Governed By Another Agreement

The most common flaw of this type is a clause stating that your note is subject to and governed by the terms and conditions of the real estate purchase and sale agreement.

 Your Note Must Contain An Unconditional Promise Or Order To Pay

Watch out for the word "IF"! It is a very short word, containing only two letters, but it has the power to render your note non-negotiable. For example, "I promise to pay if I sell my other house," or "I promise to pay if my rental income is over $2,000 a month." Anything of this nature can render your note non-negotiable.

 Your Note Cannot Be Subject To Offsets

An offset is a deduction or claim that serves to compensate for another claim, such as, "I promise to pay if the seller fixes the roof. If the seller doesn't fix the roof, I can deduct the payments from the note and pay for the roof myself." Offset clauses murder many business notes. Any offset, deduction or counterclaim can render a note non-negotiable.

 Your Buyer Must Not Have The Right Of First Refusal To Buy The Note

If the note gives the buyer such a right, he may pay it off at a discount if you decide to sell the note, which means that you are not free to negotiate the note on the open market. This renders the note non-negotiable.

 Your Note Must Not Be Ambiguous

There must be no question about the dates, the amounts of money, or the terms and conditions of the note. If two objective observers read the note, will they both think it says the same thing? If they do, there is no ambiguity. If there is room for doubt, that could render your note non-negotiable.

 Is Your Note More Than A Page And A Half Long?

If so, that is a danger signal which could indicate clauses that render your note non-negotiable. The longer the note, the more chance that a fatal flaw has been introduced.

 Variable Interest Rate Notes Present A Special Problem

They may be negotiable if you are very careful in drafting the note properly, but they can also contain fatal flaws and are generally difficult to value and therefore undesirable to a note buyer.

Courtesy of:
Wall Street Brokers, Inc.
500 Wall Street, Suite 405 - Seattle, WA 98121-1577
Voice: 206-448-1160 - FAX: 206-448-8476
Larry L. Stevens, Founder and Lorelei Stevens, President

Posted: 11/7/2001 3:18:28 PM

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