Easements
An easement is a privilege to use the land of another.
An affirmative easement is one entitling its owner to do a physical act on the land.
A negative easement allows the owner to restrict others from doing certain deeds on the
servient estate.
Definitions: 1) Dominant estate-Property getting the benefit of the easement
2) Servient Estate-Property burdened by the easement
Licenses-Permission to enter another’s land
-Revocable
-Can be explicit or implicit
-Not transferable
-No Statute of Frauds issues
Profit a prende-Right to enter another persons land without liability for trespass, and
remove minerals, wild animals, and fish for profit. A person with a profits interest has an
easement to venture onto the property as necessary to enjoy the profits interest.
I.
Implied Easements
A. Easements Implied from prior use
i)
Necessary elements
a) The unity of ownership is severed (i.e. there was a common
owner and then the land was divided.)
b) The use was in place before the parcel was severed
c) The use must have been visible or apparent at the time of
the severance(Roads and sewers)
d) The easement is reasonably necessary for the enjoyment of
the dominant estate (necessity)
B. Easement Implied by Necessity
i)
Necessary elements
a) A common owner severed the property (unity of
ownership)
b) No prior use requirement-I.E. not requirement that the use
was in place at the time of the creation of the easement.
c) There was a necessity for egress and ingress existed at the
time of the severance (There was a need for the easement at
the time of the severance.)
d) The easement is strictly necessary for egress from and
ingress to a landlocked parcel.
C. Easement by Prescription-Adverse Use
i)
Necessary Elements
a) Same as adverse possession
-Actual use
-Open and notorious
-Hostile use
-Continuous and uninterrupted use
-Exclusive use (in a minority of states)
-For the prescribed statutory period
D. Easements by Estoppel
i)
Definition-Created where A allows B to use A’s land (by
license) under circumstances where A should reasonably
foresee that B would rely on that license for a period of time.
ii)
Permission PLUS investment (reliance)
iii)
Failure on the part of the A to stop the use (Like adverse
possession)
iv)
Counter-argument-Most courts will not grant this easement if
the claimant should have verified his rights before investing
in the property.
v)
Examples: Purchasers from a developer who buy after seeing
a plat will succeed if the plat showed roads in the subdivision
in getting the right to use those roads.
vi)
Some courts don’t recognize this because of SOF issues.
They grant an irrevocable license which does not need a
writing.
vii)
Some courts use the part performance theory
viii) One or two states don’t allow any of these theories.
II.
Requirements for Running with the Land
A. Burdens running with the land
i)
Must be described in detail in the deed (or some other form)
ii)
Intent by the grantor that the easement should run with the
land
iii)
Notice
-Actual-Explicit knowledge
-Inquiry-Based on the physical condition of the land (I.E. a
roadway across your land)
-Constructive-Recorded in the deed or title
B. Benefits running with the land
i)
Intent-Did the grantor intend for the benefit to run?
ii)
Notice of some kind
iii)
Easement in writing
Express Easements
An express easement must be in writing to satisfy the statute of frauds.
When a grantor conveys property to someone else and maintains an easement for
himself, this is called an easement by reservation
A. Appurtenants- Benefits the possessor of the land (Most common)(Dominant
estate. The land that is burdened is called the serviant estate)
i)
Subdividable (Presumed, unless the intent of the grantor was that it
not be)
ii)
Must look to the language of the deed to determine the limits of the
easement.
iii)
The determinative test is whether the benefit is intimately tied to a
particular piece of land (the dominant tenement)
iv)
Fully transferable and the burdens and benefits run with the land.
B. In Gross- An easement in gross is sometimes called a "personal" easement. It
is not tied to any particular piece of land.
i)
There is no dominant estate; the burden is imposed on the servient
estate with a benefit that runs to a person or entity rather than with
the land.
ii)
It does not "run with the land" and cannot be transferred or
inherited. (Not assignable), unless it is a commercial
easement(presumed transferable)
iii)
Pipeline easements and other public utility easements are
easements in gross.
iv)
Exclusive and Non-exclusive easements:
a) Exclusive easements in gross are those where the easement
holder has the sole authority to authorize others to use the
easement. The person has the right to permit many others to
use the easement as long as the burden on the servient estate
does not amount to a surcharge or misuse of the easement.
b) Non-exclusive-One in which the easement holder can not
prevent the servient estate from granting the right to use the
easement to other persons. Can’t be subdivided or apportioned
any rights to the easement.
Termination of Easements
1) By an agreement in writing
2) By their own terms-“This easement will only last 10 years”
3) By merger (When the dominant estate and the servient estate are owned by the
same person)
4) By abandonment-Intent to abandon must be shown by explicit statement. Words
alone are not sufficient
5) Adverse possession- Stopping the person from using the easement
6) Courts may sometimes terminate by “frustration of purpose” (I.E. the easement is
no longer needed)
7) Some states require a re-titling of the easement every 50 years or so
Transfer of Easements
When the title of a servient estate is transferred, the burden of the easement remains with
the land.
When there is a benefit on the land, it depends on whether the easement was an
appurtment or in gross. An appurtment normally passes with the transfer of the dominant
estate. Also if the dominant estate is such that each of the smaller lots can benefit from
the easement, then each will generally be permitted to do so.
-Easements in gross under common law are not transferable. Modern view holds that
easements in gross used for commercial purposes are transferable.
Restrictive Covenants
To enforce the burden to run with the land
1) In writing
2) Clearly intended to run with the land-Benefit/Burdens
3) Notice
-Actual
-Inquiry
-Constructive
4) Touch and Concern the land (Reasonableness of the covenant)
Does the covenant restrict the quality and mode of enjoyment of the land?
(I.E. Residential Limits, Homeowners Assoc. Fees, Reasonable restrictive
covenants)-The third restatement eliminates the touch and concern requirement.
5) Privity- (Economic Damages only)
Horizontal-Mutual promises between the two parties and there was a transaction
of the land at the same time as the promise. (Instantaneous)
Examples-Sales, Leases (Mutual), Grant of an easement (Mutual)
a. Running of burdens:
i. For burden to run to an assignee, the covenant must be formed at the time of
the horizontal privity.
b. Benefit – Privity is not required in most jurisdictions for running of benefit.
Vertical-Privity between an original party to covenant and a subsequent
assignee. Does not have to be direct.(I.E. The previous owner was not an
original but was assigned the land by an original party)
Public Policy Rationale: reason for privity requirement was to keep land
free of burdens undiscoverable by purchaser inspecting the land. Since a
benefit increases marketability there is no requirement of privity.
i)
Strict Vertical privity (The seller did not retain any interest in the
property-I.E. full sale)
Relaxed Vertical privity (Seller retains some interest in the land)
(Most states allow this) (I.E. Whitensville)
-Leases and subleases
ii)
a.
b.
Burden: privity requires that assignee succeed to the identical
estate owned by promisor.
1. Estate must be of same duration(i.e. if you had a fee simple
and you gave someone a life estate, there would be no
vertical privity.) Covenants run with estates in land - only
will run with identical estate
2. minority rule - no privity required to enforce a burden (3rd
Restatement)
Benefits: Traditional rule holds that a benefit can be enforced by
anyone who has taken possession of the promisee’s property with
the promisee’s permission.
B has promised A that B and his assigns will never use Blackacre in a certain way (e.g.
for retail purposes) and that if they do they will pay damages. The issues are whether B’s
assignee, D is burdened by this promise (i.e. can be liable for damages) and whether C
(A’s assignee) can benefit
Damages for a Breach of Covenant-If all 5 burdens are satisfied, then you can get
injunctive relief and economic damages. If only the first four elements are satisfied, then
you can only get injunctive relief)
Policy against enforcing a benefit in gross
-A benefit in gross: some one who no longer owns a property is attempting to
control the land (Not enforceable) (I.E. Developers after they have fully developed the
land)
-Exception: Homeowner’s association
To enforce the benefit to run with the land
-Intent to run
-Touch and concern (Presumption that if intent to run with the land is satisfied, then
touch and concern is satisfied)
-If the benefit touches and concerns the promisee’s land, the benefit will run though the
burden does not. That is, the benefit can run even if the burden is in gross, i.e. personal
to the promisor.
Covenants against Competition
Reasonable covenants against competition may be considered to run with the land when
they a serve a purpose of facilitating orderly and harmonious development for
commercial use. (Whitinsville Plaza)
Changes in the area
A restrictive covenant will not be enforced where a fundamental change has occurred in
the intended character of the neighborhood that renders the benefits underlying
imposition of the restrictions incapable of enjoyment. The entire neighborhood does not
need to be changed in order to determine if the covenant is still needed.
Equitable Servitudes
1.
2.
3.
4.
5.
Definition:
Requirements
a.
Touch and Concern: both real covenants and eq. servitudes must
touch and concern the land
b.
Notice: Neither is enforceable against a bona fide purchaser
without notice
c.
Creation-Need not be in writing.
d.
Enforcement by or against assignees (requirements)
Intent
a.
no technical words (i.e. “assigns” - see covenants running at law)
are required
b.
look to purpose of covenant and surrounding circumstances
Privity of Estate - generally not required
a.
tracing title - some states require person seeking to enforce to trace
title to original promisee (i.e. must be able to trace to original
subdivision purchaser) (minority view)
b.
Third Party Beneficiary - majority of states allow 3P beneficiary to
enforce covenant in law or equity if contracting parties so intend.
c.
Distinguish - easements - easements cannot be reserved in favor of
3rd parties
Touch and Concern Requirement-The big idea, is that the covenant must
have something to do with the way land is used or enjoyed, it must connect to
land use. If it is a promise that is integrated with your property rights and
flows to successsor owners of the property, even tough they themselves did
not make the promise, the touch & concern element ensures that the
promise will stick only if it is connected to the property itself (and is not in
the nature of a personal K).
Most covenants do touch & concern the land, for example: a covenant
banning commericial uses satisfies the rule because it governs how the
land is used by WHOEVER IS THE OWNER. It connects to the property,
not the individual owner. Affirmative covenants (like the obligation to pay
association fees) have historicaly been more controversial, but now are
uniformly held to touch & concern the land. Why? even though it is a
promise to pay money that feels more like a personal K, the fee connects to
the property and enhances it value and quality.
a.
b.
c.
generally: touch and concern is a general notion - affecting
physical use or enjoyment or economic value may qualify.
Negative Covenants - touch and concern by restricting what owner
of burdened land can do; also enhance the value of benefited land.
i.
Covenants not to compete
ii. but note: in some jurisdictions this do not touch and
concern. rationale: disfavored covenants because they are
anti-competitive
Affirmative Covenants-Modern view - permit affirmative
covenants to run both in law and equity; usually held to touch and
concern
1.
exception: an affirmative covenant that imposes a
substantial burden on property which receives no
benefit from it and has no clear expiration date may
be found not to touch and concern
2.
Covenant to pay for water has no means of
expiration; thus doesn't touch and concern even
though there is intent and privity; so it does not run.
3.
Perpetuity Problem
a.
b.
c.
covenants w/out time limitations are
problematic
i) probably will not touch and concern for
affirmative covenants
ii) may need statutory support for negative
covenants (i.e. historical preservation)
touch and concern used as a catch-all for policy
concerns - doesn't just deal w/ physical nature
Want to avoid undue restrains on alienation
that last forever
i) need to have some mechanism to get rid of
covenants if conditions change
ii) note: because changed conditions is an
equitable doctrine this is especially
important for real covenants / enforcement
at law
6.
Notice-Must be actual, constructive or inquiry notice
Implied Negative Reciprocal Servitudes
Implying covenants on land that are not specifically stated
Rules:
a) Must prove a common plan(look at the pattern of the developer when they
start selling the plots) and a common grantor(the landowner group)
i.
What constitutes a common plan? Must find a suitable
number of lots in a subdivision are subjected to a common
covenant. A variation in the terms or incidence of the
covenants may indicate that the common owner did not
intend a common scheme.
ii. When does a common scheme begin? Lots may be sold
before a common plan is developed. Lots sold before the
common plan are not subject to the covenant.
iii. Geographic Boundaries of a common plan-Look to the
circumstances and facts of what the developer intended.
b) Look for promises common on a number of a tract of lands. (Numerous
tracts of lands with the same promises attached to them), look how the
property is platted(mapped) out, look how the development is advertised
and what the other residents were told. This is after the land has already
been platted.
c) One part of the development (with similar structure and platting) can have
restrictions on it and another doesn’t have to.
Example: The McLeans owned property in which they wished to build a gas
station. The parcel that they owned had no restrictions on it, but the majority of
parcels around them had restrictions limiting the use to residential purposes.
There was a common grantor. 53 of 91 lots had restrictions. The court held that
the McLeans were on constructive notice as of the restrictions on the neighboring
parcels and inquiry notice as to determine whether the restrictive covenants on the
neighboring parcels could interpreted as a plan to restrict the entire neighborhood
to residential uses. Since the majority of the neighborhood was residential, the
court inferred that the intent of original owner was to create a common plan.
The California court has found that a covenant must be recorded in a deed at the
time of purchase to apply.
Ambiguity
When there is any ambiguity or substantial doubt in the meaning, restrictive covenants
will be read narrowly in favor of the free use of property.
Restraints on Alienation
Definition: A limit on the free sale or transfer of property. Generally seen as
unenforceable, but in modern times, there are situations where it can be enforced. (Life
estates, land use restrictions, fee simple defeasible)
-Balance the consequences of the restraint versus the benefits that the restraint will allow.
Take land off the market, making it unusable for the best use; unmortgageable;
unimprovable; concentrates wealth; prevents creditors from reaching it
-In condo association situations, the power to withhold consent on the free sales of a
condo to a fair purchaser is a restraint on alienation. The association could get around
this if it found a purchaser on its own for a fair market value.
-The test for the right of first refusal is one of reasonableness is whether the refusal is
rationally related to the protection, preservation, or proper operation of the property and
the purposes of the association’s governing documents. Secondly, the power must be
exercised in a fair and nondiscriminatory manner. To withhold sale for race, sex, or other
discriminatory reasons is a restraint on alienation.
Altering leases to restrain alienation
The owners of the condos purchased their homes with the knowledge that their leases
were amendable with the additional restriction. Additionally, the restriction does not
violate any public policy. The owners of condos are on constructive notice that their
ownership rights are not unlimited and are subject to special limitations that would not be
applicable to other ownership situations. (Woodside Village)
Developer Controlled Property
Provisions allowing amendments to restrictive covenants are subject to the reasonable
test.
-Elements that the court should consider in balancing its reasonableness test
1. The character of the interest to be protected
2. The relative adequacy to the plaintiff of injunction in comparison with other remedies
3. The delay if any in bringing suit
4. The misconduct of the plaintiff if any
5. The interest of third persons
6. The practicability of granting and enforcing the order or judgment
7. The relative hardship likely to result to the defendant if an injunction is granted
and to the plaintiff if an injunction is granted and to the plaintiff if it is denied.
-Uniform rule of balancing is based on presumption that the developer is doing
something underhanded.
-The purchasers of the land have reliance that everyone is required to follow the same
plan.
-Also of consideration is the amount of money invested in the land, based on that
reliance.
Counter-Argument
The developer may argue that since he has the most votes in the association, based on his
land ownership, that he should be given the chance to exercise his franchise. Plus, the
original deed stated that the board had the ability to alter the composition of the
development. That constituted constructive notice to the other land owners. Plus, there
might be a public policy argument stating that the ability to subdivide increases the value
of it.
Public Policy
-It is impossible for the condo to list every specific condition banned. When a condo
constitution specifically allows the Board to ban certain things and conditions to create a
uniform exterior, unless there is some compelling reason, condo boards are given
deference in their decisions. (O’Buck)
-The appellate court found that the right to assemble was traditionally limited to political
and social reasons and that the potential for possible conflict with the other religious
groups who desired to use the auditorium. Such a restriction meets the standard for
reasonableness required. (Neuman)
Under the reasonableness test, the covenant does not meet the reasonable length
requirement (since it was a 40 year lease) and since the covenant restricts the use of land
specifically situation for use as a supermarket, the covenant is too contrary to the public
good. (Davidson)
Ways to terminate Equitable Servitudes and Covenants
1) By the terms of the covenant (Specified # of years pass or a specified condition
occurs)
2) Merger
3) Release-Written release by the benefitted property holder
4) Acquiescence-Pattern of violations leading almost to abandonment
5) Abandonment-High number of landowners in a common scheme violate the
covenant to such an extent that there is a significant change to the neighborhood
6) Changed conditions-Covenants can be terminated if the conditions in the
neighborhood have so changed that the covenant no longer serves its intended
purpose
7) Relative hardship-If the harm to the burdened property is disproportionally great
compared to the benefit to the neighboring properties, courts will not enforce a
covenant.
Real Estate
Disclosure of defects
Old Rule: Caveat Emptor-Puts the burden on the buyer because since they are spending
the money, they should take a full inspection of the property they are buying. On the
opposite side, the buyer is operating from a weakened bargaining position and is
vulnerable to manipulation by a seller.
New Rule-Obligation to disclose facts that 1) materially affect the value of the house and
the buyer would want to know about and are not readily observable.
Title Covenants
-Waiver of disclosure: Must be a very specific disclosure. General merger clauses don’t
count, unless they have a very specific “as is” clause. This is very controversial and is
not followed by all jurisdictions.
-Implied warranty of habitability-The developer has a superior knowledge and is assumed
to have provided a product (new residential house) that is fully habitable. That implied
warranty may or may not be waived. This is limited to only the home’s builder, not a
reseller.
-Marketable title-The seller has the obligation to provide a fully marketable title. Free
from reasonable doubt, but not every doubt. It will likely be free from title defects and
encumbrances and other person’s interests in that property. There must be disclosure of
any easements or liens or mortgages. If there is a problem that is not disclosed, the buyer
can get out of the sale and possibly get damages. Generally, a title is unmarketable if
there is a legitimate risk that the buyer would be subject to legal actions (adverse
possession, creditor’s rights) if the purchase goes through. A purchaser is not required to
buy a lawsuit, so to speak.
Buyer’s remedies for breach of the purchase and sale agreement
-Specific performance forcing the sale of the house.
-Damages-the differences between the market value at the time of breach and the contract
price.
-Rescission
-Vendee’s Lien-There is a debt owed by the seller to the buyer.
Seller’s Remedies
-Specific performance-Damages-Rescission and forfeiture of down payment
-Vendor’s lienEquitable Conversion
The person who is the buyer has equitable ownership during the executor person and the
liability is on them at that point. In some states, the insurance on the house is given to the
equitable owner, but not in all states. Therefore the seller gets the purchase price, plus
the insurance money.
Formalities
The deed must 1) identify the parties 2) describe the property being conveyed 3) state the
grantor’s signature 4) contain the grantor’s signature. There must be actual intended
delivery and not just physical delivery. Recording is not required but its stupid not to do
it.
Present Covenants
a. Warranty of title- Present Covenants from the grantor to the grantee,
starting at the date of the sale.
b. Covenant of seisen-I promise I own the property I’m selling and have the
type of estate I say I do(fee simple)
c. Covenant of the right to convey the land. Full alienation
d. Covenant against encumbrances-Promise that there are no mortgages,
liens, easements. Things that would decrease the property value.
Future covenants-starts at discovery of the defect or breach
I. Covenant of warranty
a. General warranty deed-seller will protect against all defects in the title.
b. Special warranty deed-I promise to warranty against defects the seller’s has
caused
c. Quitclaim deed-Representation by the seller that he releases my claims to this
asset, if I have any.
II.
Covenant of quiet enjoyment-No one will disturb your title
III.
Covenant for further assurances-I promise to be affirmatively bound to fix any
future problems.
Types of recording acts
-The first person who records good title to the property is the true owner of the property
unless the 2nd owner is a bona fide purchaser (someone who bought the property for fair
value, based on a statutory provision. Some states require the 2nd buyer be unaware of
the title problems. And some states combine the two)
I. Race statute (only 2 states)-The person who records first will prevail. Knowledge
is irrelevant.
II. Notice statute (half the states)-Requires the person who was a bonafide purchaser
not know that anyone else had claim to the land. Actual notice, inquiry
notice, constructive notice will suffice.
III. Race-notice. Must win the race and have no notice of the other conveyance.
Notice to subsequent claimants
In virtually all jurisdictions, the subsequent purchaser will lose if he was on notice of the
earlier conveyance
A. Actual Notice: If the subsequent purchaser is shown to have had actual notice of
the existence of the prior unrecorded interest, he will not gain the protection of the
recording act in a notice or notice-race jurisdiction.
B. Record Notice: The subsequent grantee is deemed to have record notice if the
prior interest is adequately recorded. However, the mere fact that a deed is
recorded somewhere in the public records does not mean that the recording is
adequate-the document must be recorded in such a way that a reasonable searcher
would find it. Imputed knowledge-If proper recording of the earlier document
took place, subsequent purchasers are on “record notice” even if they never
actually see the document that has been filed. That is, the court imputes to the
subsequent purchaser the knowledge which he would have had obtained had be
conducted a diligent title search.
C. Inquiry Notice: Even if a purchaser has neither record nor actual notice of a prior
unrecorded conveyance, he may be found to have been on “inquiry notice” of it.
Inquiry notice exists where a purchaser is in possession of facts which would lead
a reasonable person in his position to make an investigation, which would in turn
advise him of the existence of the prior unrecorded right. Such a person is on
inquiry notice even if he does not in fact make the investigation. (But the
purchaser is responsible only for those facts which the investigation would have
disclosed) Possession-Thus if the parcel is possessed by a person who is not the
record owner, this will place a subsequent purchaser on inquiry notice. That is,
the purchaser must: 1)view the property to see whether it is in the possession of
someone other than the record owner; and 2) if there is such a possessor, he must
inquire as to the source of the possessor’s right in the property.
Fraud
A forged deed is always void. A fraudulent deed is voidable, if there is no BFP yet.
Financing
People who buy property and borrow money have statutory rights.
1) Borrower must sign a promissory note, usually with collateral (a mortgage)
2) If the borrower defaults, the lender has the right to the sell the house
Low bid problem- Must have public notice of the public auction. Usually there is a small
# of bidders which keeps the price down.
Statutory right of redemption-Post foreclosure
Equity of redemption-Pre foreclosure.
If the sale price of the house is below the value owed on the debt, the borrower still owes
the remaining debt. In some states, this is not the case. There is such a thing as an antideficiency statute that says the sale of the house satisfies the debt, but in that case, the
bank gets an excellent price on the sale of the house.
Sometimes, the buyer borrows from the seller. The seller acts as a lendor.
INSTALLMENT LAND CONTRACT
a.
No bank will lend you money. You make a deal with the seller- Seller Sally
will finance for you. Here is what you sign up for:
b. Title: she’ll keep title.
c.
repairs: borrower lives there, pay taxes, repairs etc- in every way as if you
own it
d. forfeiture: you lose your interest and sally keeps property if default.
e.
Liquidated damages: what happens to the money you paid?
Usually the K provides that the person owed the debt (the lender Sally)
will just keep whatever you have paid up to the time of default.(this
contract term is called a liquidated damages clause)
This may or may not be enforceable, depending on what state you are in
and depending on whether the K term for damages is considered a
legitimate liquidated damages clause or is instead excessive and is
considered a "penalty" to the defaulting borrower.
Current Status of Law (p. 809-812)
a. some states ignore the liquidated damages clause and simply treat the
installment land contract as if it were a traditional mortgage. Sebastian p. 808
takes this approach it is described in note #1. The borrower will have all the
protections the law provides for a mortgagor. he may try and avoid
foreclosure by using the right to equity of redemption. If the
foreclosure occurs, the money paid to the lender pre-foreclosure will be
treated like mortagage payments that reduce the debt, and the proceeds from
the sherrifs sale will pay off the balance of the debt owed, and any excess
proceeds will be retained by the borrower.
b. some states will choose whether or not to 1) treat the debt as a traditional
mortgage or 2) enforce the K as an installment land K, depending on a list of
factors. this approach is described in note 2, p 810.
c.
ome states retain traditional installment land K doctrine. The Stonebreaker
case p 806, and note 3 p. 810 describe this approach. If this approach is taken:
1) the borrower will be evicted. 2) the borrower may or may not get back
some of the money they have paid to the lender. In other words, the liquidated
damages clause may or may not be enforceable. It depends on whether it is
viewed as a penalty, in which case it will NOT be enforced or whether it is
S
indeed a legitimate liqudated damages clause.To determine this the court will
look at what the actual damages amount to. Damages include the amount of
rent that the possessor (the borrower) would owe if they had been a tenant
("lost rent" is counted as a damage since the title holder (sally the lender) lost
the right of possession on account of the K. Add to that any attorney's
fees, costs necessary to repair the property and any costs for having to find a
new buyer. Once all the damages are added up, you compare the actual
damages to how much the borrower has paid the lender and see if the amount
paid to date to the lender is "grossly disproportional to actual damages". If it
is NOT grossly disproportional, then the lender can retain all amounts paid. If
it is grossly disproportional, then it is a "penalty" and the lender cannot
retain the full amount paid. The lender must refund to the borrower, the
difference between actual damages and the amount paid to the lender.