Higher default interest enforceable and not a penalty

The High Court has found that a contractual term allowing the lender to charge default interest was enforceable and not a penalty. 

The test for the court to consider in penalty cases is whether charging a default rate protects a legitimate interest and, if such an interest exists, whether the sum payable is nevertheless extravagant, exorbitant or unconscionable. 

In this case, a facility letter stated that any event of default, not only non-payment, switched the interest rate to the default rate.

The court considered whether the lender had a legitimate interest in charging the same default rate for all events of default, regardless of their differing severity for the lender.

It was established that it is justifiable to charge a higher rate on a non-payment default. However, for defaults indicating that the borrower is in difficulty, but which do not immediately affect repayment, it was less clear whether the lender could charge a higher rate on the whole loan amount when that default occurred. The possibility of not refinancing the loan at the end of the term was considered by the court to be a legitimate credit risk for the lender. Therefore, defaults that might lead to a potential new lender assessing that the borrower was uncreditworthy, merited the same default rate as for a repayment default.

Applying the test that the parties are the best judges of whether the default rate was legitimate, combined with expert evidence that the rate was in the range of what was considered commercially acceptable, meant that the court concluded that the default rate was not unduly high when assessed against each of the default scenarios.

Houssein v London Credit Ltd [2025] EWHC 2749 (Ch)