Arising out of a dispute relating to a loan agreement, this case has now been the subject of numerous court decisions. It considers when a high interest rate can become a penalty and thus unenforceable as well as looking at the position around tender of payments.
Background
In 2020 a facility agreement (the ‘Facility Agreement‘) was signed between London Credit Ltd (‘LCL‘) and a company, CEK Investments Ltd (‘CEK‘) for a loan of approximately £1.8 million. CEK was owned by Mr and Mrs Houssein, who wanted to use this loan to refinance a pre-existing bridging loan in relation to other properties within their portfolio. Both Mr and Mrs Houssein gave personal guarantees of CEK’s obligations under the Facility Agreement, and LCL also took charges over six properties owned by the Houssein’s.
The Dispute
As an unregulated lender, LCL was legally prevented from residential mortgage lending to individuals. The Facility Agreement was secured by mortgages over a number of properties owned by the Houssein’s, including one in Barnet, London, which was subject to a restriction on occupation during the term of the loan. This was further supported by a representation from CEK that there was no intention for the property to be occupied.
Until we know we are wrong, being wrong feels exactly like being right” Kathryn Schulz
This non-occupancy requirement was allegedly breached at various points through 2020, leading to LCL claiming an event of default. The Houssein’s argued that no event of default had occurred, but LCL began proceedings to seek repayment of the loan and the interest.
Under the terms of the Facility Agreement, the standard rate of interest was 1%, rising by an extra 3% per month in the event of a default, making a compound default rate of 4% (the “Default Rate”), which was the rate claimed by LCL. The Houssein’s argued that the Default Rate amounted to an unenforceable penalty.
PenaltiesThe leading authority on penalties, Cavendish Square Holding BV v Talal El Makdessi (Rev 3) [2015] UKSC 67, states that a default rate could potentially be a penalty if it imposes a detriment on the contract breaker which is “out of all proportion to any legitimate interest of the innocent party” and whether the sum requested could be regarded as “extravagant or unconscionable”.
If you make a bad bargain, hug it all the tighter” Abraham Lincoln
It was noted that the Default Rate in this Facility Agreement was above the market rate at that time. The judge carefully considered the lenders legitimate interests in determining whether the rate could be classified as punitive.
LCL had to be able to protect its interests, in particular, ensuring that the loan was repaid, that the representations and warranties given by the borrowers when making the agreement were upheld, protecting the security they held under the loan and ensuring that the non-residency obligation stipulation is adhered to. These considerations led to the conclusion that whilst the Default Rate was considered to be “at the borderline of commercial acceptability” as opined by David Griffiths of Expert Evidence International Limited, and certainly above the market rates of the time, it was acceptable considering the interests LCL sought to protect.
Further the court heard from expert witnesses regarding the compounding of the interest, and it was confirmed that in similar loans a default rate of interest would be compounded, as it had been here, with Mr Griffiths confirming that it was “unusual for lenders to apply default interest on a simple interest basis“.
Applying the Makdessi test to independent, properly advised parties contracting on agreed terms, as was the case here, the court held that the Default Rate was not so extortionate or unconscionable so as to amount to a penalty, and the hi
Tender of payment
The court also discussed the circumstances where the court will exercise its equitable discretion to disallow the continued recovery of interest after a lender has refused a tender of payment. A tender of payment is where a borrower offers to repay the full amount owed and acts to stop the further accumulation of interest.
The big print giveth and the fine print taketh away.” Fulton J. Sheen
Here, however, despite offers from the borrowers to repay, they did not successfully stop the interest from running. The court ruled that expressing a willingness to redeem a loan is not enough to stop the interest from accruing. To be a valid tender of payment, the Houssein’s would have to have unconditionally set aside funds for the repayment, available for the lender immediately.
Outcome
The Houssein’s appeal was dismissed. This decision illustrates that the courts will be reluctant to conclude that a provision which has been negotiated and agreed between the parties should subsequently be regarded as a penalty. When executing the Facility Agreement, the Houssein’s had other financing options available to them and freely chose to enter into this agreement with LCL on the terms stipulated. The Default Rate was not a penalty, and as a result it was enforceable by LCL in the event of a default, as occurred here.
Conclusion
A reminder for contractual parties that all provisions should be carefully considered and that the best time to consider whether they are penal in nature is at the negotiating table before agreeing to be bound by them.
Link: Houssein & Ors v London Credit Ltd & Anor [2026] EWCA Civ 830 (01 July 2026)
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