WORLD OF FIGURES: Take care when signing agreement that has penalties

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 be required to pay the interest plus the outstanding balance; that it Sh21.7M + Sh3,255,000 = Sh24,955,000. Perhaps this is the reason why he has decided to change his mind.

INTEREST STILL APPLICABLE

Now that he has changed, the interest is still applicable. So, the Sh3,255,000 should be subtracted from the amount he has 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 let’s 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!