Take care when signing agreement that has penalties
By MUNGAI KIHANYA
The Sunday Nation
Nairobi,
06 January 2019
Githuku Mungai has
an agreement for
the sale
of a plot of
land.
The agreed price was Sh30 million.
The deal was to be completed by 31st December 2017. If the
buyer exceeded that date before completing payments, he was to be
charged 15% interest on the outstanding balance.
As things turned out, only Sh8.3 million had been paid by the 31st
December deadline. Still, on 31st May 2018, the buyer paid
Sh700,000 and this was accepted by the seller.
But in
December
2018, the buyer conceded
that he is unable to continue and so will get
a portion of the land based on the
Sh9
m paid.
Githuku would like to know how much interest should be charged for
exceeding the deadline.
I will assume that
the 15% interest is applied annually. The calculation would have been
easier if the buyer had not paid the Sh700,000 in May 2018. In such a
case, the seller would have simply worked out 15% of the unpaid balance;
that is, (Sh30M Sh8.3M) x 15% = Sh3,255,000.
If the buyer was
still interested in the entire plot of land, he would have been required to pay
the interest plus the outstanding balance; that is Sh21.7M + Sh3,255,000
= Sh24,955,000. Perhaps this is the reason why he has decided to change
his mind.
Now that he has
changed his mind, the interest is still applicable. So, the Sh3,255,000 should be
subtracted from the amount paid before deciding what size of land
has been paid for. That is, the net payment for land is Sh8.3M -
Sh3,255,000 = Sh5,045,000. Thus, he gets 16.8% of the land.
So far, so good; now
lets factor in the Sh700,000 paid in May 2018. Assuming that the
interest is not compounded on a monthly basis, then the amount
accumulated by the end of May is Sh3,255,000 x 5/12 = Sh1,356,250.
The buyer then paid
Sh700,000 thereby reducing the balance to Sh21M. This remained unpaid
for the remaining seven months of the year. Thus, it accumulated Sh21M x
15% x 7/12 = Sh1,837,500 in interest.
Therefore, the total
interest is Sh1,356,250 (for January to May) plus Sh1,837,500 (for June
to December); that is, Sh3,193,750. Again; this money should be deducted
from the total payment before deciding what proportion of land the buyer
will get.
This is done as
follows: net amount paid for land = Sh9M Sh3,193,750 = Sh5,806,250.
So, the proportion of land to be given to the buyer is 19.35%.
This transaction
illustrates one important point: whether you are the buyer or the
seller, be careful when you enter a sale agreement that has interest and
penalties. You might find that the amounts are much bigger than you
imagined. Worse still; it might even be impossible to do the
calculations!
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