Parents often lend significant sums to their grown-up children to assist with large purchases such as a first home. The parents take back a self-drafted promissory note or IOU payable on demand (the “Note”) thinking that the loan will be settled when the child has the means, or in the worst case scenario, through their estate. A recent decision of the Ontario Court of Appeal has confirmed the little understood law of Notes. In the result, a two year old Note, on which there has been no payment, is likely worthless on its face.
Demand notes are complicated by the application of the venerable legal principle that the limitation period during which to sue begins to run from the date of execution, not as one might think, the date of demand. Layer onto this the dramatic change a few years ago to the Limitations Act whereby most limitation periods run for only two years from the date the cause of action arose and suddenly the Note becomes a ticking time bomb.In the recent decision, the Court thought it was doing the public a favour in creating certainty, however, it may have unwittingly set the stage for intergenerational battles between parent and child or perhaps future estate squabbles among siblings.In the current commercial context, the Note continues to be used albeit with some caution. For example, businessmen can sign forbearance agreements whereby the limitation period is extended even though there is default in payment. Unfortunately, in the non-commercial world, the parties cannot legally enter into forbearance agreements. The two year period may come and pass without any ability to extend or modify it.Some simple, practical solutions may be considered. For example, a parent might enter into a term loan rather than a demand Note. The term would expire on a date when it is anticipated that the child would be in a position to repay. If repayment in full is not made by the end of the term, a fresh document could be entered into. The term loan would not simply evaporate at the end of two years.Consideration should also be given to taking security to bolster future enforcement. For example, if the loan was for the purpose of buying a home, a mortgage would stand not only as collateral but also to bolster arguments for an extension of the limitation period. Other techniques such as regular acknowledgments or partial payment may also assist the parent.In the world of Notes, the ending can come as a complete surprise. The supremely patient parent who, through the best of intentions, continues to defer payment throughout his or her lifetime may be doing no-one any favours. He or she is leaving behind the potential for large legacy imbalances among the children leading to litigation within the estate. Proper family loan planning can prevent surprises.