REAL ESTATE TRANSACTIONS AND FINANCE
Fall Semester 2015
Payment, Satisfaction, and Prepayment
Default Interest and Late Charges
Reading Assignment: NWBF pp. 592-623
1.
Lambert Properties, LLC owns The Free Market, a local shopping center, on which Equitable
Life Assurance Company holds a mortgage in the original principal amount of $10,000,000, bearing
interest at 8% annually. Lambert Properties, LLC incurred this mortgage 5 years ago, in 2010.
Monthly payments are interest-only payments for a 10-year term, with all principal due and payable
at the end of the 10-year term. The mortgage says, “In the event of a prepayment, Mortgagee may
collect a fee equal to 6% of the amount prepaid.” Lambert Properties, LLC wants to use available
cash from profits from the sale of another project to pay off the mortgage on The Free Market.
Assume that prevailing interest rates are now 10%. Equitable refuses to accept prepayment unless
it is also accompanied by the specified $600,000 prepayment fee.
(a)
Is Equitable harmed by this prepayment?
(b)
Can Equitable refuse to accept the prepayment?
(c)
Can Equitable enforce the $600,000 prepayment fee as a fee for accepting the
prepayment?
(d)
Suppose that Lambert Properties, LLC defaults on the loan. Equitable then declares
a default, accelerates the debt, and sends a letter demanding that Lambert Properties,
LLC pay the $10MM principal balance + the $600,000 prepayment fee, or Equitable
will begin a foreclosure. Lambert Properties, LLC then tenders $10MM to Equitable
and files suit seeking an injunction against Equitable’s threatened foreclosure. What
happens, and why?
2.
Does a “yield maintenance clause” (discussed in note 2, page 606) effectively produce a
prepayment fee that is equivalent to the lender’s actual damages from prepayment? Why or why
not? If a yield maintenance clause is enforceable, why would a mortgage ever use a “flat percentage
fee” provision like the one in Problem 1?
3.
How is the “breakage fee” provision in the mortgage in Lopresti (page 597) different from
a yield maintenance fee (if at all)? Is that provision more advantageous to the borrower than a yield
maintenance clause? Why or why not?
4.
In the Westmark case (p. 615), the mortgage lender sues to collect both default interest as
well as late charges.
(a)
If the lender collects both default interest and late charges, is this “double counting”
or “double recovery” by the mortgage lender? Why or why not?
b)
Suppose that a mortgage note provides that the principal balance of the note will bear
interest at the rate of 8% until an event of default occurs, at which point the interest
rate increases to 16% until the default is cured. Is that default interest rate
considered valid, or an unenforceable penalty? What additional information would
be useful to you in evaluating this question?
5.
Uphoff owns land subject to a mortgage in favor of Bank. Uphoff has a contract to sell the
land to Mitchell, for a price of $200,000, with closing to occur on November 1. In anticipation of
the closing, Uphoff requests that Bank provide him with a statement indicating the balance due on
the mortgage as of November 1 (the anticipated closing date). Bank provides a payoff statement
indicating that the balance due on November 1 is $125,000. Uphoff thinks that the Bank’s payoff
amount is wrong; he thinks the correct amount is $124,000. Uphoff pays $124,000, but Bank refuses
to issue a satisfaction/release of its recorded mortgage. What happens: (a) if Uphoff is correct (i.e.,
if the payoff amount was wrong)? (b) If the Bank is correct?
6.
Same situation as Problem 5, but now assume that the Bank provides a payoff statement
indicating that the balance due on November 1 is $124,000. Uphoff pays $124,000. However, Bank
later refuses to issue a satisfaction/release of its recorded mortgage, saying “We gave you the
incorrect payoff amount; as it turns out, the correct amount was $125,000. Pay us the additional
$1,000 and we’ll release the mortgage.” Can the Bank collect the additional $1,000? Could it
foreclose the mortgage if this amount isn’t paid? How could Mitchell, as Buyer, protect himself
against the risks posed by this Problem?