Illegal Interest Rate Didn't Void Entire Lease

A lease gave a tenant the option to buy a building for $412,000. The owner would finance the purchase over 20 years at an interest rate of 7 percent for the first 60 months. When the tenant tried to exercise its option, the owner demanded that the tenant agree to new option terms. The tenant sued the owner for violating the lease. The owner argued that the entire lease was void because that 7 percent interest rate was illegal.

The Arkansas Supreme Court ruled that the lease's 7 percent interest rate was illegal and void, but the rest of the lease was enforceable against the owner. Under Arkansas law, the maximum lawful rate of interest would have been 6.25 percent during the first 60 months of the lease. The court noted that the state's constitution said that contracts that have a “usurious—that is, illegally high—rate of interest would be void “as to the unpaid interest.” The constitution didn't require the entire contract to be voided [Van Carr Enterprises, Inc. v. Hamco, Inc.].