If you lend money on property deals, you’ll know that the devil is often in the small print. One of the most important – and often argued – parts of any facility or loan agreement is what happens if the borrower doesn’t repay on time. That’s where “default interest” comes in.
A recent High Court case, Houssein v London Credit Ltd [2025] EWHC 2749 (Ch), is a reminder that even high default rates can be enforceable, provided they serve a genuine commercial purpose rather than a punishment.
The background
The borrowers, Mr and Mrs Houssein and their company CEK Investments, borrowed just under £1.9 million from London Credit Limited (LCL) – a well-known short-term property lender. The loan was secured over a portfolio of buy-to-let properties, and the facility letter set two key rates:
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Standard interest: 1% per month (12% per year)
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Default interest: 4% per month, compounded monthly – effectively around 60% per year
When the borrowers failed to repay on the agreed date, LCL applied the higher default rate. The borrowers argued that it was an unlawful penalty – excessive and unfair.
The High Court originally agreed with them, saying the 4% rate was out of proportion. But the Court of Appeal sent the case back for a full re-look.
The key question
Was the 4% monthly default rate an unenforceable penalty, or a legitimate reflection of the lender’s increased risk once repayment was missed?
That question turns on the Supreme Court’s decision in Cavendish Square Holdings v Makdessi [2015] UKSC 67, which holds that a clause will be a penalty only if it imposes a detriment “out of all proportion to any legitimate interest” the lender has in enforcing the contract.
What the court decided this time
Deputy High Court Judge Richard Farnhill ultimately found in London Credit’s favour. He held that:
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The lender’s default rate clause was not a penalty.
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LCL had a legitimate commercial interest in charging a higher rate once payment was late, especially given the credit risk and the fragile refinancing structure.
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The borrowers had been advised by professionals and had other options – they weren’t forced into an unfair deal.
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The 4% rate, though high, was within the bounds of what a private secured lender could reasonably charge in the market.
The judge accepted that this was a “robust” rate, but it wasn’t extortionate. The lender’s risk increased dramatically once the loan wasn’t repaid – not only because of credit risk, but because the security (buy-to-lets and a family home) became harder to realise.
Why this matters for lenders
The decision gives comfort to non-bank and private lenders who make short-term, property-backed loans. It confirms that default interest clauses can withstand a court challenge if properly drafted and commercially justified.
But it’s also a reminder to lenders to be careful:
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Default interest should be clearly stated in the facility letter or loan agreement.
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The rate should be justifiable by reference to risk, not punishment.
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The clause should be drafted to reflect different types of default if appropriate (for example, non-payment versus breach of other terms).
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Borrowers should be given proper advice – courts take that into account.
Practical takeaway
If you lend money secured on property – whether through your company or personally – make sure your loan and security documents are watertight. Courts are more likely to enforce tough terms where the documents are clear and professionally drafted.
This case shows that a well-structured facility letter with a strong commercial rationale can protect you even when things go wrong.
If you’re lending money for property redevelopment or investment and need help preparing or reviewing your documents, I can help. I regularly advise on loan agreements, facility agreements, personal guarantees, and security documents.
📞 Get in touch with me, Steven Mather, Solicitor, to discuss your lending documents before you sign.
(You can also read more on my blogs about facility agreements and loan agreements)