Houssein v London Credit Ltd: default interest, penalty rules and lender risk

Background of the dispute

Houssein & Others v London Credit Ltd 2025 arose out of a commercial bridging loan entered into in August 2020 between London Credit Ltd (“LCL”) and CEK Investments Ltd, a company controlled by Mr and Mrs Houssein. The loan facility was approximately £1.88 million and was secured by:

• Legal charges over multiple residential investment properties
• Personal guarantees from the Housseins
• A mortgage over the Houssein family home

The facility agreement provided for two interest rates:

• Standard interest: 1% per month
• Default interest: 4% per month, compounded monthly

The default interest rate would apply on the occurrence of an Event of Default, defined broadly to include:

• Failure to repay the loan on the contractual date
• Breach of covenants (such as a non-residence obligation relating to the family home)
• Deterioration of creditworthiness or other contractual breaches

The Housseins disputed the enforceability of the default interest provision, arguing that a 4% per month default interest rate amounted to an unenforceable penalty clause under English contract law.

Procedural history and earlier judgments

1. Houssein – first judgment – High Court (2023)

The High Court initially found that the default interest rate was, in its entirety, a penalty and therefore unenforceable. The judge held that:

• The 4% default rate did not protect a legitimate commercial interest of the lender beyond simple compensation
• The rate was disproportionately high compared with the risk involved
• The penalty rule (now governed by the Cavendish test) rendered the clause unenforceable

Under this ruling, the borrowers would have been limited instead to a contractual rate or statutory interest where applicable.

What is the Cavendish test?

The Cavendish test is a landmark English contract law rule established in the case of Cavendish Square Holding BV v Talal El Makdessi 2015 to determine if a contractual clause is an unenforceable penalty. It assesses if a secondary obligation (i.e clauses triggered by a breach of contract) imposes a detriment out of all proportion to the innocent party’s legitimate interest.

2. Houssein – second judgment – Court of Appeal (2024)

The Court of Appeal overturned the High Court’s penalty finding and remitted the case back to the High Court for reconsideration applying the correct legal test.

The Court of Appeal emphasised that the trial judge had not correctly applied the two-stage penalty test derived from the Cavendish case:

• Does the clause protect a legitimate commercial interest of the innocent party?
• If so, is the clause extravagant, exorbitant, or unconscionable relative to that interest?

The Court noted that lenders inevitably have a legitimate interest to secure repayment under loan agreements, including interest, fees and costs. The issue of whether the 4% rate was disproportionate had to be assessed in the context of evidence (such as market standards and the lender’s risk exposure).

3. Houssein – third judgment – High Court (2025)

On remittal, Deputy Judge Richard Farnhill considered whether the default interest rate was a valid contractual provision or an unenforceable penalty under English law.

Application of the penalty test

The judge applied the two-stage penalty test:

1. Legitimate Interests

The court accepted that LCL had multiple legitimate interests supporting the default interest clause, including:

• Ensuring timely repayment of the loan
• Protecting the value of the security
• Safeguarding against deterioration in the borrower’s creditworthiness (particularly relevant given the borrower’s reliance on refinancing)
• Enforcing compliance with covenants such as non-residence which had regulatory and commercial significance to the lender

2. Proportionality

Although the 4% monthly rate was above common market standards (around 3% per month in bridging finance), the judge found it not “extravagant, exorbitant or unconscionable” in the circumstances:

• The borrower’s ability to refinance was precarious and even minor credit deterioration could jeopardise repayment
• The broad range of defaults capable of triggering the default rate was justified given the lender’s legitimate commercial position
• The evidence demonstrated that the clause was not a penalty, but served commercial purposes in protecting the lender’s exposure

The High Court upheld the default interest clause as enforceable and confirmed that a 4% per month compounded default rate did not constitute an unenforceable penalty in this case.

Impact on lenders and commercial lending

This judgment has significant implications for lenders, borrowers, and the drafting of loan agreements in the UK:

1. Clarification on penalty rules and default interest

The judgment emphasises that:

• A high default interest rate does not automatically equate to a penalty clause
• Courts will carefully scrutinise default interest provisions in the context of the legitimate commercial interests they protect
• The Cavendish two-stage test remains central to penalty analysis

2. Importance of drafting and evidence

Lenders should ensure:

• Default interest clauses are clearly linked to legitimate commercial objectives and not merely punitive
• Documentation and evidence support the commercial rationale for the rate relative to the risk, market standards and lending context
• Triggers for default interest are properly aligned with risk management rather than technical or incidental breaches

3. Market practice and commercial certainty

The judgment provides reassurance that:

• Commercially justified default interest rates will generally be upheld if proportionate
• Lenders can rely on robust default interest provisions, particularly in bridging and short-term finance markets where higher costs of capital and refinancing risk are prevalent
• However, courts will scrutinise broad triggers tied to non-monetary defaults to ensure they reflect legitimate interests

4. Guidance for borrowers

Borrowers should be aware that:

• Challenging default interest as a penalty is viable only where it can be shown that the clause protects no legitimate commercial interest or is disproportionately high against that interest
• Evidence of market standards and lender pricing can be relevant, but greater weight will be given to the commercial justification of the clause under negotiation

Conclusion

Houssein & Others v London Credit Ltd 2025 is key modern authority on the enforceability of default interest clauses under English law. It reinforces that:

• Default interest provisions, even where high, can be upheld where they reflect genuine commercial interests
• The penalty doctrine under the Cavendish test must be applied with careful analysis of interests and proportionality
• Both lenders and borrowers must take care in drafting and interpreting interest provisions to align with legal principles and commercial realities

Blake Morgan’s specialist Banking & Finance team advise lenders, funders and borrowers on the full spectrum of banking and finance matters.