Default interest rate remains in lender’s legitimate interests

Houssein & Ors v London Credit Ltd & Anor [2026] EWCA Civ 830 (01 July 2026)

This is the fourth court decision relating to a dispute arising out of a loan agreement (Facility Letter). The earlier decisions are summarised in our previous article: Default Interest Rates and Penalty Provisions | Hill Dickinson.

A key issue was whether the default interest rate (Default Rate) in the Facility Agreement was a penalty and, therefore, unenforceable. The Chancery Court originally decided that it was a penalty, but the Court of Appeal found that the lower court had not applied the correct test under English law for determining whether a contractual provision is a penalty.

After the matter was remitted to the Chancery Court for reconsideration, it decided that the Default Rate was not in fact a penalty and was enforceable. The Borrowers’ appeal to the Court of Appeal has now been dismissed.

The Court of Appeal’s judgment makes two things clear. Firstly, that the old test for penalties, namely whether the provision in question is a ’genuine pre-estimate of loss’ has now been discarded. Rather, the question is whether the provision is out of all proportion to any of the innocent party’s (here, the Lender) legitimate interests. That requires the Court to identify what those legitimate interests are.

Secondly, that the appellate court will be very reluctant to interfere with a judge’s evaluative decision absent an identifiable flaw in his judgment. There was no such identifiable flaw in this case in the judge’s evaluative assessment of the Lender’s legitimate interests.

The background facts

In brief, pursuant to the Facility Letter, London Credit Ltd (LCL) granted a loan of just over £1.8 million to a company, CEK Investments Ltd (CEK), that was owned by Mr and Mrs Houssein. The loan was intended to help Mr Houssein refinance a bridge loan that he had previously taken out in relation to his portfolio of properties.

Mr and Mrs Houssein gave personal guarantees of CEK’s obligations under the Facility Letter. LCL also took charges over two properties owned by the Housseins.

A dispute subsequently arose between the parties as to whether an event of default under the Facility Letter had occurred due to breach of a non-residency provision. An event of default permitted LCL to accelerate the loan and terminate the facility.

LCL commenced proceedings, seeking repayment of the loan and interest. The Standard Rate of interest under the Facility Letter was 1% per month and the Default Rate was 4% compounded monthly. LCL claimed the Default Rate on the basis that they argued there had been an event of default.

The Borrowers in fact repaid £1.2 million of the loan amount and there were discussions between the parties regarding payment of the balance and to resolve all outstanding issues. However, the Borrowers disputed the Default Rate of interest claimed by LCL. Among other things, they argued it was an unlawful penalty, being a 400% increase on the normal interest claimed.

The Chancery Court decision

Pursuant to the Supreme Court decision in Cavendish Square Holding BV v Talal El Makdessi (Rev 3) [2015] UKSC 67 (4 November 2015), the leading authority on the modern law of penalties, a Default Rate could potentially be a penalty because it was a secondary obligation, that was only payable upon breach of a primary obligation, if it imposes a detriment on the contract-breaker out of all proportion to any legitimate interest of the innocent party in the enforcement of the primary obligation.

The judge was, therefore, required to evaluate LCL’s legitimate interests in making the loan and consider whether, in relation to any of those legitimate interests, the Default Rate was out of all proportion.

The judge considered each event of default that was relevant to the facts of the case separately. He found that the Default Rate was not extortionate in relation to any of those legitimate interests. He concluded it was not a penalty.

The judge also highlighted that: (i) there was a strong presumption that the parties themselves were the best judges of what was legitimate provided that they were properly advised and of comparable bargaining power; and (ii) deterrence is not penal if there is a legitimate interest in influencing the conduct of the other party beyond retaining the right to recover damages for breach of contract.

The Court of Appeal decision

The Court of Appeal noted that the judge had heard expert witness evidence, and the experts were agreed that it was normal, in loans of this kind, that a default rate of interest would be compounded. It was unusual for lenders to apply default interest on a simple interest basis. However, it was acknowledged that the Default Rate in this case was above market rate.

The judge had also addressed in detail five legitimate interests for LCL, with a key one being Credit Risk Interest i.e. preserving the Borrower’s ability to repay the debt when due. There was predictive Credit Risk i.e. the likelihood of a borrower such as this one defaulting on its payment obligations and descriptive Credit Risk i.e. post-payment default. On the judge’s assessment, it was not extortionate for LCL to charge an above market Default Rate.

Among other considerations influencing the judge’s evaluation was that any default that related to the Credit Risk Interest could have adverse consequences for any potential refinancing which was, at best, precarious. LCL was an unsecured lender – as an unregulated lender, it was not authorised to secure the loan by way of mortgage over the property in which the Borrowers resided – and it was, therefore, at greater risk in view of penalties under the Financial Services and Markets Act 2000 which included unlimited fines and up to two years’ imprisonment.

Therefore, LCL had a very strong interest in ensuring that the Borrowers’ creditworthiness did not deteriorate during the life of the loan, and that if there was any change, they would take necessary steps to resolve the situation quickly.

The Court of Appeal also warned against reliance on selective snippets of evidence to undermine a trial judge's conclusion. It also highlighted that an appeal court is bound, unless there is compelling evidence to the contrary, to assume that the trial judge has taken the whole of the evidence into his consideration even if he does not mention a specific piece of evidence. When an appeal court is asked to overturn a judge's finding of fact, the acid test is whether that finding is rationally supportable. In this case, in the Court of Appeal’s opinion, the judge made rationally supportable findings of fact.

The Court of Appeal also upheld an earlier finding by the Chancery Court that nothing the Borrowers had done stopped interest from running.

The appeal was, therefore, dismissed.

Comment

The Court of Appeal’s decision provides a timely reminder that the English Court will now be more reluctant than previously to label a contractual provision that has been freely negotiated between commercial parties as a penalty. In this case, the Borrowers apparently had other financing options, they were not obliged to go with LCL.

As ever, careful and considered drafting of contractual provisions can help to pre-empt subsequent arguments about whether or not a particular provision is a penalty.

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