Williams v. Fassler, 110 Cal. App. 3d 7, 167 Cal. Rptr. 545 (1980)

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

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

Williams sued for a declaratory judgment, asking the court to rule that the prepayment penalty was invalid.

Could Fassler enforce the penalty provision?

Does it make any difference whether the court treated the ranch as residential property?

Could Fassler have included a lock-in clause in the loan agreement?