In Houssein and others v London Credit Ltd and others [2025] EWHC 2749 (Ch) the Court found that a default interest rate of 4% per month compounding compared to a standard simple contractual interest rate of 1% per month was not a penalty, despite expert evidence that the standard market default rate was around 3% compounding per month.
The judge considered the various risks which the default rate was intended to protect against in the agreement, including the risk of non-payment, the risk of a borrower’s actions having regulatory implications for the lender, and the risk of a borrower becoming more of a credit risk over the life of a lending arrangement.
Ultimately the Court found that each of those risks gave the lender a legitimate interest in charging a default rate, and that a rate of default interest 1% above the market standard was high but not extortionate.
This case provides helpful guidance to parties (particularly lenders) who regularly use or rely on default interest clauses in their agreements.
Contracting parties will need to consider all the primary obligations in an agreement that a default interest clause is intended to protect. In this case, that included standard repayment obligations, but also requirements that secured property should not be used as a residence for the borrower’s shareholders. It also included automatic events of default such as the borrower being subject to an adverse judgment.
Whilst the judge considered that the lender had a legitimate interest in protecting each of those obligations with a default interest provision, he did not find that a legitimate interest in protecting a repayment obligation ‘trumps’ other primary obligations. On that basis, a default interest clause which seeks to protect a primary obligation which a party is not found to have a legitimate interest in protecting, may still be a penalty. This may be the case even if the default interest provision also protects a legitimate interest like a repayment obligation.
This case also provides helpful guidance on what the Court might consider to be an “extortionate” default rate, as required by Makdessi1. In this case, a default rate of 4% per month; 1% per month above what expert evidence considered to be market standard (3% per month), was ruled to be high, but not extortionate. The Court was able to make a judgment on the rate based on the witness and expert evidence before it. Whilst in this case the default rate was the same across each type of default, the judge found that he had had evidence before him that a dynamic rate (i.e. one which varied across defaults) was possible, but not common in the market.
The case arose out of a facility agreement under which a facility was extended to a corporate borrower to provide short term bridging finance for a property portfolio.
Proceedings were initiated during the term of the loan regarding an alleged event of default which were resolved in 2023. However, part of the loan remained unpaid at the end of its term, constituting an event of default under the facility agreement, and triggering a contractual default interest clause.
The court initially found that the default interest provision in the facility agreement was penal. That finding was overturned by the Court of Appeal, which found that a lender has a good commercial justification for charging a default rate of interest following a failure to repay2. The Court of Appeal remitted the matter of whether the default rate was extortionate to the first instance judge.
The judge had before him witness evidence as to how and why the default rate was set, the credit and other circumstances of the borrower, and expert evidence as to the wider market and default rates charged.
The primary issue before the Court was whether a default rate (which applied to both repayment obligations and other primary obligations) under a facility agreement was penal, and in particular, whether a rate of 4% per month was extortionate when compared with a standard contractual rate of 1% per month, and a market standard default rate of 3% per month.
Whilst the Court of Appeal has indicated that repayment of a loan will always be a legitimate interest for default interest provisions, the judge distinguished this case from Lordsvale, Ahuja and Cargill as those cases had only been concerned with a default rate in the context of non-payment3.
This case involved a default rate which applied to numerous different types of default under the facility agreement, some of which were automatic, for example the borrower being subject to a judgment debt over a certain threshold. This was relevant as the Westwood4case suggested that using one default rate across multiple such obligations may be an indication of penalty.
The judge conducted a sustained analysis of these types of default and concluded that the borrower had a legitimate interest in protecting each of them with a default rate. This was particularly the case where a default could (a) cause significant harm to the lender by way of causing it to be in breach of relevant legislation, and (b) could impact the borrower’s ability to repay the loaned amounts, something that was particularly pertinent for short term bridging lending.
Having satisfied himself as to the legitimate interest of the lender, as required by Makdessi, the judge then assessed whether the rate was extortionate. He indicated that he had changed his mind on this point from his first instance decision on the basis of new evidence heard at the remitted hearing. Specifically, the judge heard and accepted evidence that a small change in the borrower’s financial/credit position could have a big impact on their ability to refinance, and therefore to repay the loan. Accordingly, a default rate which was higher than market rate was not extortionate in this context given the magnitude of the default it was attempting to guard against.
In conclusion, parties should have in mind that default interest provisions can have a legitimate interest for multiple reasons, not just non-payment. However, that also means that a default interest will be tested against all of those reasons, rather than just one or two where there is a clear legitimate interest. Witness and expert evidence remains vital in evidencing whether or not a rate is extortionate.
1 Cavendish Square Holding BV v Talal El Makdessi [2015] UKSC 67
2 Houssein and Ors v London Credit and another [2024] EWCA Civ 721
3 Lordsvale Finance plc v Bank of Zambia [1996] QB 752; Cargill International Trading PTE Ltd v Uttam Galva Steels [2019] EWHC 476 (Comm); Ahuja Investments Ltd v Victorygame Ltd [2021] EWHC 2382 (Ch).
4 Vivienne Westwood v Conduit Street [2017] EWHC 350 (Ch).
