What’s the Best Documentation?

“Is it legal?”

That’s a common question we get from readers who write with a range of problems and proposed solutions. One woman who recently moved from Oregon wanted to know if the will she prepared there was “legal” in California. Another reader wanted to know whether a promissory note he was about to sign was “legal.”

Let’s take that latter example and review why the wrong question--Is this legal?--is being asked. Say a person is about to make a loan of $10,000. The note the borrower signs reads:

“I promise to pay to (name of lender) the sum of $10,000 with interest at 7% in monthly installments of $1,000. Dated Aug. 29, 1992. Signature of borrower.”

The borrower received the $10,000 and signed the paper. Is the promissory note legal? If, by legal , we mean that the note can be introduced in evidence in a lawsuit the lender might bring if the borrower does not pay, the answer is yes, it can be introduced in evidence to support a lawsuit to collect the funds owed. So, in a sense, it is legal. It is not illegal, anyway.

But is it the best that the lender can get? The question should really be: What is a good or better or best kind of legal documentation for such a loan?

In fact, that may be the question in the minds of most people who ask whether something is legal. The fact that it is legal or valid in all states or even in other countries is not critical. Your objective shouldn’t be merely to have something that is “legal.” Having a legal document that provides the best protection might be a better goal.

Here are some points to consider about this particular note:

* It is a bit ambiguous. Does the $1,000 monthly payment include interest or is interest to be paid each month in addition to the $1,000. Such an ambiguity need never occur.

* When is the first monthly payment due? The note doesn’t say.

* There is no provision for attorney fees and other costs if the borrower defaults and the lender needs to sue. It is fairly standard to include such a protection for a lender, but it is not always done.

* If the borrower defaults (doesn’t pay) on a monthly payment, may the lender at that time claim that the entire amount is due and owing and sue for the entire amount? Not under the terms of this note. In many promissory notes, there is a provision that says that in the event of default of a monthly payment, the whole balance becomes due and payable.

* There are other elements of this transaction that could have been considered and added to the note. The lender may have asked for security for the loan or perhaps the guaranty of a third party or could have required the agreement and signature of the spouse of a married borrower.

In other words, there are lots of things that are, strictly speaking, “legal,” but that shouldn’t stop the inquiry for the best in legal advice.