{"id":3196,"date":"2024-01-29T13:06:01","date_gmt":"2024-01-29T13:06:01","guid":{"rendered":"https:\/\/rfblegal.co.uk\/?post_type=insight&p=3196"},"modified":"2025-11-14T14:34:46","modified_gmt":"2025-11-14T14:34:46","slug":"uberbruckungskreditgeber-verzugszinsen-hochstrichterliches-gericht-halt-4-verzugszinsen-fur-eine-nicht-durchsetzbare-strafgebuhr","status":"publish","type":"insight","link":"https:\/\/rfblegal.co.uk\/de\/einblicke\/uberbruckungskreditgeber-verzugszinsen-hochstrichterliches-gericht-halt-4-verzugszinsen-fur-eine-nicht-durchsetzbare-strafgebuhr\/","title":{"rendered":"Bridging Lender\u2019s Default Interest Rate: High Court Deems 4% Default Interest an Unenforceable Penalty Charge"},"content":{"rendered":"

Note: The case has subsequently been dealt with by the Court of Appeal. You can read the outcome of the Court of Appeal judgment in our new article “Bridging Loans \u2013 Does a Bridging Lender\u2019s Default Interest Rate Constitute an Unenforceable Penalty?”<\/a><\/p>\n\n\n\n

\n\n\n\n

In a recent case \u2013\u00a0the High Court has held that a default interest rate of 4% in a short-term loan agreement secured by residential property constituted a penalty and was unenforceable.<\/em><\/p>\n\n\n\n

The Collateral and Terms of the Loan<\/strong><\/h2>\n\n\n\n

The lender (L) loaned \u00a31.9 million to another company, owned by H and N, secured by mortgages on various properties, including their family home and five buy-to-let properties.<\/p>\n\n\n\n

The Loan agreement provided that in the event of a material breach, L could appoint a receiver, sell the properties, and impose a 4% per month<\/em> default interest rate in the event of a material breach.
<\/p>\n\n\n\n

Assessing Whether a Default Interest Rate is a Penalty<\/strong><\/h2>\n\n\n\n

The 4% monthly default interest rate, a fourfold<\/em> leap from the standard rate, proved to be an unenforceable penalty. Applying t<\/em>he principles from the case of El Makdessi v Cavendish Square Holdings BV<\/strong><\/a><\/em>, the central question in assessing whether a default interest rate is a penalty is whether the extent of the uplift has a satisfactory explanation in protecting a legitimate interest<\/em>. While, in principle, charging a higher rate on default could be commercially justified because of an enhanced credit risk for a borrower, it was doubtful that this could be claimed here by L.
<\/p>\n\n\n\n

Why Higher Default Rates Could Not Be Justified<\/strong><\/h2>\n\n\n\n

H\u2019s and N\u2019s credit issues could have legitimately led a lender to consider them to be a higher risk. However, there were additional factors to consider:
<\/p>\n\n\n\n

1. L had previously priced in an increase to reflect the additional credit risk, moving the rate from 0.7% to 1% to reflect a judgment against N. L did not provide any evidence as to why late payment justified an increase of a further 3% when a 0.3% increase had been sufficient in relation to the standard rate to adjust for creditworthiness
2. The same level of default interest applied regardless of the nature of the breach
3. The default rate was set centrally by L, meaning that it could not be set by reference to the specific risks of the borrower or the particular loan. Expert evidence suggested that a typical default rate at the time of the loan was lower than the default rate in this case.
<\/p>\n\n\n\n

The Legal Takeaway<\/strong><\/h2>\n\n\n\n

The case of underlines two critical principles:
<\/p>\n\n\n\n

1. Customised Rates<\/strong>: Interest rates should be tailored on a transaction-by-transaction basis to protect the \u2018legitimate interest\u2019 of the lender
2. Proportionate Penalties<\/strong>: The rate should be proportionate to the risks faced by the lender in a default scenario
<\/p>\n\n\n\n

Contact Us<\/strong><\/h2>\n\n\n\n

Should you have any queries about this topic please contact senior litigation Partner David Burns<\/em><\/strong><\/a> by email at D.Burns@rfblegal.co.uk<\/em><\/strong><\/a> or by phone on 07762318409<\/a>.<\/em><\/strong><\/p>\n\n\n\n

Additional Info<\/strong><\/h3>\n\n\n\n
    \n
  • News Author:David Burns<\/li>\n<\/ul>","protected":false},"author":1,"featured_media":3197,"parent":0,"menu_order":0,"template":"","format":"standard","meta":{"_acf_changed":false,"om_disable_all_campaigns":false,"_uf_show_specific_survey":0,"_uf_disable_surveys":false,"footnotes":""},"categories":[20,46,19],"tags":[81],"class_list":["post-3196","insight","type-insight","status-publish","format-standard","has-post-thumbnail","hentry","category-property-litigation","category-regulatory-law","category-residential-property","tag-litigation-team-dj"],"acf":[],"aioseo_notices":[],"yoast_head":"\nHigh Court Deems 4% Default Interest<\/title>\n<meta name=\"description\" content=\"Note: The case has subsequently been dealt with by the Court of Appeal. 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