Bridging Loan Disputes: How to Manage Defaults, Enforcement and Unfair Terms

Bridging loans are short-term loans, typically secured against property, designed to provide fast finance. They are usually for 6 to 18 months, carry higher interest rates than standard mortgages, and often include fees for arrangement, repayment, and default. 

Used properly, bridging loans can be a valuable tool. They can help landlords buy at auction, enable developers to unlock stalled projects, and provide breathing space for investors. 

But the very features that make bridging loans attractive (speed, flexibility, and short terms) are also what make them risky. If an exit strategy fails or deadlines are missed, disputes arise quickly, and both borrowers and lenders can find themselves exposed.  

At Ronald Fletcher Baker, we see a growing number of disputes involving bridging loans. Below, we explain how these disputes commonly arise, the legal principles involved, and the practical steps borrowers and lenders should consider.  

Common Problems in Bridging Loan Disputes 

Default and Enforcement 

The most common problem is default, i.e., the borrower cannot repay by the agreed date. That may be because a sale has fallen through, long-term finance has been refused, or market conditions have changed. Lenders typically respond by: 

• Demanding immediate repayment of the full balance; 
• Charging default interest (often much higher than the standard rate); 
• Appointing Law of Property Act (LPA) receivers to take control of and sell the secured property; and / or 
• Commencing possession proceedings.  

Borrowers often dispute whether enforcement was valid, or whether the lender acted unfairly in moving so quickly.  

High Default Interest 

Bridging loan agreements often contain  increased rates of interest upon default. The default interest rate are sometimes several percentage points per month. Borrowers facing spiralling debt may argue the default rate of interest is not recoverable if in law it amounts to an unenforceable penalty. 

Under English law, a contractual term can be struck down if it is a penalty clause, i.e., it imposes a detriment out of proportion to the lender’s legitimate commercial interest. Following the Supreme Court decision in Cavendish v Makdessi [2015], the courts take a nuanced approach.  

Whether a clause in an agreement is a penalty is decided as a matter of construction of the relevant provision, and it in essence (a) whether a legitimate business interest is served and protected by the clause, and (b) whether the rate is nevertheless extravagant, exorbitant or unconscionable 

Unfair Relationship (Consumer Credit Act 1974) 

Some bridging loans are regulated by the Consumer Credit Act 1974. This is more likely if the borrower is an individual (rather than a company), and the loan is not wholly for business purposes.  

If the relationship between lender and creditor is unfair on one or more of the bases set out in section 140A(1)(a)-(c) of the CCA, remedies are available to the court to ensure that the relationship is no longer unfair. 

A relationship can be deemed unfair because of: (a) the terms of the agreement or any related agreements; (b) the way the creditor exercised their rights under the agreement; or (c) any other thing done or not done by, or on behalf of, the creditor. Examples of factors could include: 

• Excessive charges of hidden fees. 
• Lack of transparency on terms. 
• Aggressive enforcement  

If the court agrees, it can exercise very wide powers, including: 

• Altering terms of the agreement. 
• Reducing the borrower’s liability. 
• Releasing or modifying security.  

Even if the loan is unregulated, reputational risk means lenders need to be cautious about how terms are presented and enforced.  

Receivership and Sales at Undervalue 

Lenders commonly appoint LPA receivers once a borrower defaults. The receiver’s job is to take control of the property and sell it to recover the debt. 

Borrowers often challenge receivership on grounds such as: 

• The appointment was invalid. 
• The receivers failed to market the property properly.  
• The property was sold at an undervalue.  

The principal duty of the receiver is to preserve and (assuming the receiver has power to do so) realise the assets to which they are appointed, in order to repay the liabilities of the chargor secured by the charge. 

Receivers must act in good faith and take reasonable steps to achieve the best price reasonably obtainable, but note they are not guarantors of the “best possible” price. Case law such as Medforth v Blake and Silven Properties v RBS confirm that receivers have wide discretion, provided they act reasonably.  

A receiver cannot be passive, but must actively work to manage and realise the assets with the objective of repaying the secured liabilities (Silven Properties). 

In fulfilling their duties, the receiver must act with reasonable competence (Medforth v Blake). What is reasonable will depend, in part, on the circumstances of the particular receivership. For example, if appointed to assets of a specialist nature, for which there is a small market of experts, the reasonably competent receiver will seek specialist advice and assistance in marketing and selling the assets to ensure that the market is properly exploited. 

Although free to choose when to sell the receivership assets, having made the decision to sell, the receiver must take reasonable steps to obtain the best price possible at the time of sale (Downsview Nominees Ltd). 

The receiver cannot discharge their duty to obtain the true market value of the assets by delegating the marketing and sale of the property to an adviser. Accordingly, if an adviser provides negligent advice as to the value of the charged assets, the adviser risks putting the receiver in breach of their duty to the chargor (American Express). 

Misrepresentation and Broker Conduct 

Disputes often arise around the way the loan was sold. Borrowers may claim they were told refinancing would be straightforward, when in fact it was not, or that fees or charges were not properly explained, or interest rates were unclear or misleading.  

Where brokers or intermediaries are involved, questions can arise about who is responsible for any misstatements. Borrowers may have claims against brokers as well as lenders.  

Valuation Issues 

Bridging lenders usually rely on property valuations before advancing funds. If those valuations are overly optimistic, losses can follow. Disputes may then arise: 

• Lenders may bring claims against valuers for negligence. 
• Borrowers may argue they relied on an inflated valuation when entering the loan. 

These disputes often require expert evidence and can become complex quickly.  

Legal Principles to Bear in Mind 

• Default interest rates: As to the principles of law concerning whether a provision for default interest is an unenforceable penalty, the Supreme Court approved a three-stage test in Cavendish Square Holding BV v Talal El Makdessi (Rev 3) [2015] UKSC 67: 

A liquidated damages clause will not amount to an unenforceable penalty, provided: (1) it is a secondary obligation triggered by a breach of contract (this is a threshold question); (2) the clause is in furtherance of a legitimate interest which the innocent party has in the performance of the primary obligation; (3) and the clause is not extortionate, exorbitant or unconscionable.  

• Arrears run from default: Once default interest kicks in, liabilities can rise quickly. 
• Receivers’ duties are limited but real: They must act in good faith and achieve proper market value, but they do not have to wait for the “perfect buyer”.  
• Unfair relationship is a real tool: In regulated loans, courts have broad powers to intervene in circumstances where the relationship was unfair.  

The operation of these provisions has been most helpfully summarised in the speech of Lord Leggatt JSC in Smith v Royal Bank of Scotland plc [2024] AC 955 at [12]-[29]. In summary: 

(1) The court must determine whether the relationship arising out of the agreement (rather than the agreement itself) is unfair.  

(2) The question is whether the relationship is unfair at the time when the determination is made, even if the relationship has ended (which it has not in the present case).  

(3) The focus must be on whether the relationship is unfair because of one or more of the three matters set out in section 140A, which I have set out at paragraph 148 above. These are extremely broad possible causes of unfairness, and there is no restriction on the matters to which the court may have regard in deciding whether the relationship is unfair to the debtor, provided only that the court thinks them relevant.  

(4) The court must consider the whole history of the relationship, going back not only to the making of the credit agreement but to any relevant act or omission of the creditor before the making of that agreement or any related agreement.  

(5) The court has a very wide remedial discretion, where a determination of unfair relationship is made, in deciding what order, if any, to make. The aim is to remove the cause(s) of the unfairness which the court has identified, and to reverse any damaging financial consequences to the debtor of that unfairness, so that the relationship as a whole can no longer be regarded as unfair. 

What Borrowers Should Do 

• Act early: if repayment looks difficult or there are problems with the planned exit, engage with the lender before default. Silence usually accelerates enforcement. 
• Review the loan terms: check the wording of interest, fees, and enforcement rights.  
• Keep evidence: if promises were made by a broker or lender, record them.  
• Seek advice: some loans may be regulated, opening additional protections. Legal advice is vital before disputing terms or enforcement.  
• Consider negotiation: agreeing revised terms may be more realistic than litigating while interest mounts.  

What Lenders Should Do 

• Be transparent: set out all fees, interest rates, and enforcement rights clearly at the outset. 
• Keep records: maintain a paper trail of what the borrower was told and what information they provided.  
• Enforce carefully: moving too quickly or too harshly can hand borrowers arguments about unfairness.  
• Use reputable receivers: to minimise challenges to enforcement and sale values. 
• Get early legal input: especially where multiple securities, personal guarantees, or cross-defaults are involved.  

Frequently Asked Questions 

Are bridging loans always regulated? 

No. Many are unregulated, especially where the borrower is a company or the loan is for business purposes. But some consumer-purpose loans are regulated under the authority of the Financial Conduct Authority (FCA), principally the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001, and by the Consumer Credit Act.  

Can default interest be challenged? 

Yes, in certain cases. Courts may, in certain circumstances, strike down terms that are penal or unfair. 

Can receivers be stopped from selling? 

Sometimes. Borrowers can apply to court to challenge appointments or sales, but whether the appointment can be successfully challenged depends of the precise circumstances of each case.  

Do receivers have to achieve the best possible sale price? 

No, but they must act in good faith and take reasonable steps to get proper market value. 

Can a borrower delay enforcement? 

In some cases, borrowers can apply to court to challenge unfair terms or enforcement. But the timeframes in bridging loans are tight, so advice must be sought urgently.  

 What happens if the property is sold for less than the lease? 

The borrower is usually still liable for any shortfall, plus costs and interest, unless terms are altered by negotiation or court order. 

Conclusion 

Bridging loans serve a real commercial purpose, but they are unforgiving products. For borrowers, default can quickly spiral into large debts. For lenders, aggressive enforcement carries litigation risks.  

Disputes in this area often turn on the fine print of the loan agreement, the way the lender or receivers have acted, and whether the loan is regulated. Both sides need clear, early advice to protect their position.  

At Ronald Fletcher Baker, we have acted for both borrowers and lenders in bridging loan disputes, including litigating claims about enforcement and unfair terms. If you are facing a dispute over a bridging loan, our Property Litigation team is here to help. 

Property Litigation Matters: Contact Us 

Ben Lewis is an associate solicitor in RFB’s litigation department and David Burns is the senior litigation Partner. 

For enquiries on this topic, please contact Ben Lewis via email at B.Lewis@rfblegal.co.uk or by phone on 0203 947 8892 or David Burns at D.Burns@rfblegal.co.uk or by phone on 0207 467 5751.