Chapter 12 CASE PROBLEM

Kirk v. Dickson,

Mr. Dickson owned a 20-acre ranch with a house on it in Stanislaus County. He agreed to sell it to Mr. Kirk for $114,000. For income tax reasons, Dickson didn't want to collect the full price at the time of the sale, so Kirk executed an $80,940 promissory note and a trust deed in favor of Dickson. Kirk was to pay $8,709 (principal and 8.75% annual interest) each year for 20 years. The note provided that if Kirk paid anything extra during the first five years of the loan, Dickson would charge a 50% penalty on the extra amounts.

Seven months after buying the property, Kirk decided to build a new house there. He couldn't obtain financing for the project unless he paid off Dickson's trust deed. But if Kirk did that, Dickson would charge the 50% prepayment penalty on more than $70,000so the penalty alone would come to more than $35,000.

Kirk sued for a declaratory judgment, asking the court to rule that the prepayment penalty was invalid. Could Dickson enforce the penalty provision? Does it make any difference whether the court treated the ranch as residential property? Could Dickson have included a lock-in clause in the loan agreement?