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I have paid $100,000 on an Option for a building with the seller carrying paper. Section 5 of the Option says: "In the event the Buyer cannot make the final payment ($175,000) by July 31, 2009, the Seller will extend the Option date two (2) months with a penalty of seven and one-half percent (7 1/2 %) of the unpaid balance for each month the payment is late." I have been out of town and returned Aug 1, 2009 (a Saturday) at which time I contacted the seller to let him know I am back. He asked that we meet on Monday the 3rd which we've done. He contends that I owe the entire months 7 1/2% ($13,125) for being 3 days late. I contend that if anything, I only owe 3 days prorated ($423.39). The extension clause states FOR EACH MONTH THE PAYMENT IS LATE. It does not say beginning the first day of the month or within the month nor is a specific payment date each month specified. Who is right?
Optional Information: State/Country of Question: Oregon Already Tried: My attorney is also working on this.
You're probably both wrong.
Characterizing this additional cost as a penalty triggers the court's authority to deny it, entirely, unless it represents a fair approximation of the actual damages suffered by the injured party. In other words, a court would probably refuse to enforce the clause because there are no forfeitures/penalties allowed in contract law.
However, the court could imply that what the parties intended was that in order to maintain the option in force, that an additional payment of $X is justified as consideration for the maintenance of the option. The problem is that the court cannot read something into the contract that isn't there. And, it doesn't say that the option is to be maintained in exchanged for $X -- it says that the option is subject to a penalty.
Assuming that the court were to go with some sort of "substance over form" argument, that implies a maintenance payment, then a prorata maintenance is as viable an argument as is a monthly maintenance, because the terms of the contract state 7.5% "for each month that the payment is late."
Frankly, this is not an argument that will be won based on the law. It will be the judge's interpretation of the contract verbiage, and it will be squarely within the court's discretion to make that interpretation.
One thing is for sure. Litigating this will cost a lot more than the amount of money at stake in the penalty, so it may be worth it to both parties to try to come up with a satisfactory number, before the legal fees explode.
Hope this helps.
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The seller indicates that his attorney has advised him to give me nothing at all back AND to sue me for damages because he had two people try to buy the building while the option was in force, and he turned them down stating he had already sold it (to me) and now they are no longer interested. He claims I have damaged him by backing out, however part of the Option also states that I forfeit $50,000 if I do, and while nobody wants to lose 50G, he's already ahead by that amount. The bone of contention for both of us is does the penalty apply for the entier months period starting the first day of the month, or does the wording of the Option clause 5 mean when its late by a month?
As I already stated, as soon as the judge sees the word "penalty," he/she will want to know what sort of actual damages the seller has suffered. The fact that someone else made an offer during the option period is irrelevant, because during that period, the seller couldn't sell, so there are zero damages. If a buyer comes along now, and you are disputing the matter, then the seller may be able to show damages if you cannot reach a settlement and the prospect disappears.
You haven't backed out, so that argument is BS. The question is what is the "penalty" worth. The answer is what are the actual damages. So far, they are zero based on your facts. So, then, there are two possibilities: (1) the option is expired and you have lost your money, or, (2) the option remains in force, subject to your payment of a maintenance fee, which is what the parties really meant by the word "penalty." Obviously, you don' want option number 1. You want #2, and you want it to reflect the reasonable expecations of the parties, which in your opinion is prorata, and in your opponent's opinion, is an entire month.
It's simply a judgment call for the court. Your risk is that the court tries to strongarm you into a settlement by suggesting that it might rule option #1, if you don't settle.
This sort of thing happens all the time in Oregon courts, because the judges really like to avoid litigating. They want to move cases from the inbox to the outbox as fast as possible -- even though they don't have that heavy a case load.
Experience: Retired (mostly)
The whole reason for all this is that I AM trying to back out but he wants an entire months interest for being 1 day late doing so. The option states I lose 50K only. He is offering me 32K instead based on an entire months penalty. I say it should be no more than 3 days. That's the entire issue.