Daily Development for Tuesday, February 28, 2007
by: Patrick A. Randolph, Jr.
Elmer F. Pierson Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri

SPECIFIC PERFORMANCE; USURIOUS INTEREST RATE:  Court did not err in awarding specific performance of the remaining provisions of a lease containing an option to purchase the property at a usurious interest rate, and tenant did not waive the issue of usury by seeking specific performance.

Van Carr Enter. v. Hamco, Inc.,2006 WL 649985 (Ark. 3/15/06)

Landlord and tenant entered into a fixed term commercial lease agreement with an option to purchase the building, which could be exercised at any time during the period of the lease.  If tenant elected to purchase the building, landlord agreed to finance the purchase at an interest rate of 7% for 5 years and thereafter at 6% above the Federal Discount Rate (FDR) for 15 years.  On the date of the lease, the FDR was 1.25%. 

Article 19, Section 13 of the Arkansas Constitution provides that the maximum lawful rate of interest on any contract cannot exceed 5% above the FDR at the time of the contract, and any contracts having a rate of interest in excess of the maximum lawful rate shall be void as to the unpaid interest. 

Tenant filed suit alleging breach of contract and seeking specific performance under the lease.  Landlord countered that the contract contained an unlawful rate of interest and was illegal on its face.  The circuit court declared that the interest rate under the contract was usurious and void but awarded specific performance of the remaining provisions of the contract and voided the remaining leases.  On appeal, the Supreme Court affirmed the circuit courts decision and rejected landlords argument that tenant should be estopped from asserting that the interest rate in the contract was usurious because tenant waived the issue by seeking specific performance of the contract.  The Court reasoned that because the contract at issue is void as to the unpaid interest under Arkansas law, a borrower cannot waive a usury defense by simply requesting specific performance of the remaining clauses of the contract.

Comment 1: The editor found interesting the courts willingness to let the contract go forward despite the significant change in the return to the seller based upon the usury finding.  But thats usury law - very severe, and therefore to be avoided if at all possible.

Comment 2: The editor also found interesting the courts failure to apply thetime price doctrine, which states that a seller can charge a different price for payment over time, even if the price is expressed as composing both principle and interest, and still the payment is a payment for the thing sold, and not for a loan of money or an advance of credit.  Consequently, under this doctrine, usury laws do not apply to seller financing.  Apparently Arkansas, under its constitutional usury provisions, has decided not to follow that law.

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