A promissory note is a written, unconditional promise to repay a defined sum on agreed terms. In property transactions, it records the debt behind an agreement for sale, a construction facility, or a refinance, specifying principal, interest, payment dates, and remedies.  

With tighter oversight and e-sign/e-stamp adoption, documentation has improved, as noted in the Economic Survey 2024–2, with 1.38 lakh RERA-registered projects. 

For a clearer understanding, consider a middle-income buyer who books a flat, pays part from savings, and borrows the balance. A clear promissory note fixes sums, dates, interest, and cures so the lender has defined inflows, the borrower has clear dues, and the builder has aligned cash flows for timely possession. 

This guide covers different types of promissory notes, such as secured, unsecured, convertible, and demand notes. It also explains what a personal note is, and gives drafting, legal, and troubleshooting checkpoints.

Key Takeaways:

• A promissory note is a legally binding promise to repay a specified amount, commonly used in property transactions to define debt terms.

• Different types include secured, unsecured, convertible, and demand notes, with each suited to specific risk profiles and cash flow conditions.

• Personal notes are unique in that they tie the repayment obligation to an individual, often used when project cash flows are uncertain.

• Legal safeguards such as clear default clauses and proper documentation ensure enforceability and protect both lenders and borrowers.

• Proper drafting and attention to detail, including interest rates, security, and enforceability, are key to avoiding disputes and ensuring smooth transactions.

What are Real Estate Promissory Notes? 

The Negotiable Instruments Act defines a promissory note as an instrument in writing containing an unconditional undertaking to pay, signed by the maker, payable to a determinate payee on demand or at a certain time. This statutory form is the baseline for enforceability in Indian transactions.

Purpose in property: 

• Evidence of consideration or deferred price in an agreement for sale or a construction contract

• Contractual base for interest, charges on default, and acceleration mechanics

• Anchor for creating and perfecting security, such as a mortgage, a charge on receivables, a pledge of shares, or escrow arrangement

Current Market Backdrop

The following data points frame the operating context for drafting and pricing promissory notes:

• Repo rate at 5.50 per cent after the June 2025 cut. Borrowing costs on many floating home loans moved lower, which affects pricing in notes drafted at variable rates. 

• Individual housing loans outstanding at ₹33.53 lakh crore by September 2024. Widespread retail credit use increases the incidence of notes and allied security. 

• Maharashtra e-registration adoption for first-sale properties is rising. This normalises digital documentation flows that sit alongside promissory notes.

Legal Implications and Safeguards

Ensure the note satisfies statutory form and is enforceable with clear default and remedy terms.

Safeguards for lenders

• Verify signer capacity and authority

• Perfect and register security/charges on time

• Align note with mortgage, escrow, and facility documents

• Keep proof of consideration and fund flow

Safeguards for buyers and developers

• Cap default interest; define cure periods

• Add “no oral modification” and entire-agreement clauses

• Match the dispute forum and process to the main contract

Regulatory touchpoints

• RERA use-of-funds and escrow compliance for registered projects

• Company-law limits on related-party lending and inter-corporate deposits

• KYC and AML checks for private lenders

If you’re involved in real estate transactions and need clear guidance on promissory note structures, BCD India offers valuable expertise. Our team helps you understand the complexities of financing, legal documentation, and compliance, ensuring your deals are secure and well-executed across all sectors, from residential to commercial.

With a clear understanding of the legal framework, let's now explore the different types of promissory notes used in real estate transactions.

Types of Real Estate Promissory Notes

Four common forms of promissory notes appear in property deals generally. These include secured, unsecured, convertible, and demand notes. 

Selection depends on the risk profile, cash flow timing, and the parties’ security package. Draft terms should mirror the underlying transaction (sale, facility, refinance) and specify payment source, enforcement route, and inter-creditor position.

1) Secured Promissory Notes

A note backed by collateral, usually a mortgage on the property, a charge on project receivables, or a pledge over shares in the project entity. Security must be perfected and registered within statutory timelines to preserve priority.

When used

• Standard home loans and loans against property

• Developer funding where land, development rights, escrowed receivables, or unsold units back the loan

• Refinancing near-complete projects with steady sales

Key clauses to capture

• What the security is and how it will be perfected and registered

• What counts as a default, and how long the cure window is

• Acceleration, enforcement steps, and order of applying recoveries

• Inter-creditor position if more than one lender is involved

• Insurance assignment, reserve accounts (DSRA), and escrow of collections

Risk–return

• Usually, a lower interest rate than that of unsecured notes

• Better chances of recovery because the lender can enforce on the collateral

• Tighter reporting and covenants are common

Also Read: Understanding Types of Commercial Real Estate Property

2) Unsecured Promissory Notes

A note with no specific collateral. Recovery depends on the borrower’s cash flows and covenant strength. Lender comfort often rests on information rights and financial covenants.

When used

• Short bridge funding to close a purchase

• Adjustments to earnest money or booking amounts between buyer and seller

• Developer working capital, where creating security would delay the drawdown

• Small amounts while a mortgage is still under sanction

Risk management

• Higher interest and closer covenants to offset the lack of security

• Personal guarantees from promoters or directors

• Cross-default to other loan papers, so a default elsewhere also triggers this note

• Cash sweep from stated receivables and limits on taking new debt

Also Read: Hidden Charges in Home Loan - All you need to know about them

3) Convertible Promissory Notes

A note that can convert, on set triggers, into equity or quasi-equity in the project company. It aligns downside protection (debt) with upside participation (equity).

When used

• Early land aggregation or special-situation funding

• Institutional investors who want a share in upside

• Pre-approval or pre-sales phases, where cash flows are still uncertain

Conversion mechanics

• How the conversion price is set and the allowed range

• Triggers such as receipt of approvals, sales milestones, or a date-based option

• Rights after conversion (board rights, information rights) and the order of payouts on exit

• Anti-dilution and transfer rules to keep the cap table stable

Also Read: 5 Simple Steps to Start Investing in Real Estate

4) Demand Promissory Notes

A note payable on demand without a fixed maturity date. It documents repayable-on-call obligations and often supports revolving usage.

When used

• Support for a revolving facility or overdraft used for project expenses

• Recording inter-company or promoter advances, subject to tax and company-law rules

• Short-term settlement of price adjustments or working capital gaps

Operational nuance

• Plain demand and notice wording so repayment requests are clear

• How interest will be calculated and when it resets

• Link to a separate facility agreement that sets limits and security

• Stated use of funds, right of set-off, and keeping account statements as conclusive records to avoid disputes

Also Read: Essential Real Estate Business Ideas to Follow in 2025

What is a Personal Note in Real Estate?

A personal note is a promissory note where the repayment obligation sits with an individual borrower or promoter, rather than only with the project company (special purpose vehicle). 

It is a direct, personal promise to pay and can sit alongside project-level security, such as a mortgage or charge on receivables. This structure strengthens lender comfort when project cash flows are not yet stable. 

How do Personal Notes Differ From Other Promissory Notes?

To bridge into specifics, the table below sets out how a personal note differs from a standard project note at a glance.

Also Read: Roles, Types, and Duties in Real Estate Property Management

Typical Uses of Personal Notes in Real Estate

These are the common situations where a personal note is practical:

• Promoter support for early land payments, approvals, or initial mobilisation where the project company is not yet ready to borrow.

• Short-term buyer obligations for balance consideration while a mortgage is being sanctioned.

• Bridge funding from private lenders, where the personal covenant stands in until full project security is created.

Drafting Essentials to Keep in Mind

Cover these points so the obligation is clear and enforceable:

• Clear description of personal capacity and, if applicable, joint and several liability

• Cross-link to the main facility or sale agreement for defaults and remedies

• Disclosure of existing personal guarantees or encumbrances

Once you've identified the appropriate note type, it’s essential to focus on the finer details when drafting the note to ensure its clarity and enforceability.

Considerations When Creating a Real Estate Promissory Note

Establish clarity around key terms, including the amount, rate, tenor, security, events of default, enforcement steps, and dispute forum. Keep the note consistent with the sale deed, facility letter, escrow, and mortgage documents to ensure no gaps exist.

Use the points below as a working list during drafting and negotiation:

• Amount and tenor — Fix principal, repayment dates, prepayment rights, and any step-up coupon.

• Interest — Choose fixed or floating; note reset dates, day-count, default rate, and any compounding.

• Security — State mortgage/charge/pledge, escrow of receivables, DSRA, or third-party guarantee.

• Covenants — Information rights, project milestones, insurance assignment, and negative pledge.

• Inter-creditor — Pari passu or subordination, cure rights, standstill periods.

• Tax — TDS on interest, stamp duty, and any discount/OID treatment.

• Governing law and forum — Name the State court jurisdiction or arbitration seat and rules.

• Digital execution — Note Aadhaar e-sign and e-stamping, where permitted by the State.

Clause-by-Clause Drafting Template

Use this table as a fill-in guide for the promissory note. Replace placeholders with deal-specific details, keep dates objective, cross-link to the main facility or sale documents, and match the security to what is actually available.

Note:  Promissory notes attract stamp duty under the Indian Stamp Act and State amendments. Duty, timing of stamping, and impounding consequences are state-specific. Refer to Schedule I and the relevant State schedule before execution.

Even with a well-drafted note, challenges can arise. Let’s address some of the common pitfalls and how to resolve them.

Common Challenges and Solutions

Most disputes arise from unclear terms, weak security, or mismatched cash flows. Precision in drafting and timely compliance reduces enforcement risk.

Some frequent pain points and practical fixes include: 

Final Thoughts

Understanding the different types of real estate promissory notes and their specific applications is essential for structuring solid, secure property deals. Whether you’re opting for secured, unsecured, or convertible notes, it’s crucial to align your financial and legal strategies with the needs of the transaction to ensure smooth execution and protection for all parties involved.

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FAQs

Q: Can a promissory note be modified after it is signed?
A: Yes, a promissory note can be modified, but such changes must be clearly documented in writing and signed by both parties. A “no oral modification” clause is often included to prevent informal changes and ensure that any amendments follow proper procedure.

Q: What is the difference between a promissory note and a loan agreement in real estate transactions?
A: A promissory note is a simpler, unilateral promise to repay a debt, often used for short-term or smaller amounts. A loan agreement, on the other hand, is a more comprehensive document that outlines the terms of the loan, repayment schedule, interest rate, and collateral requirements, and it is generally used for larger, more complex transactions.

Q: Can a promissory note be used for cross-border real estate transactions?
A: Yes, a promissory note can be used in cross-border real estate transactions, but it must comply with both the laws of the country where it is executed and international regulations. It’s essential to ensure proper documentation, currency considerations, and jurisdictional clarity for enforcement in both countries.

Q: What role do personal guarantees play in unsecured promissory notes?
A: In unsecured promissory notes, personal guarantees from the borrower or project promoters serve as an additional layer of security. These guarantees make the individual personally liable for repayment, which offers lenders some protection despite the lack of collateral backing the note.

Q: How does RERA impact the use of promissory notes in real estate deals?
A: RERA (Real Estate Regulatory Authority) ensures transparency and compliance in real estate transactions. Promissory notes in RERA-registered projects are closely scrutinised for compliance with regulations, including escrow account management, fund usage, and project timelines, to protect both the buyer and the lender.