The bridging loan industry continues to see high demand and is continuing to grow, but the risk of defaults remains high.
As a Senior Litigation Partner, I frequently see instances of default. Bridging loans rely on a strict exit strategy, such as selling a property or refinancing, which can be impacted by a slow market.
Bridging loans are high-speed, short-term financing solutions designed to “bridge” a funding gap, typically for property transactions. However, their specialised nature makes them unforgiving products where default can occur quickly.
1. What Constitutes a Default?
In the bridging market, “default” is a broad term that extends far beyond failing to make a monthly payment. The circumstances that amount to a default will depend on the precise terms of each bridging loan facility but common examples of defaults on bridging loans include:
- Term Expiry: Failing to repay the full loan balance by the agreed maturity date of the bridging loan (the most common cause).
- Technical Breaches: Breaching specific loan conditions, such as starting refurbishments without consent or living in a property intended for rent.
- Condition Precedent Failure: Not submitting required documentation, like planning permissions, within a set timeframe referred to in the bridging loan documentation.
- Financial Covenants: Falling behind on monthly interest payments on the bridging loan if the loan is not “rolled-up”.
2. The Immediate Consequences of Default
Once a default on a bridging loan occurs, lenders can act swiftly to protect their interests, potentially leading to a rapid escalation of debt.
- Default Interest Rates: Lenders often apply significantly higher interest rate immediately upon default. Some lenders seek to compound this interest which can cause the debt to increase exponentially.
- Loan Acceleration: The lender may demand immediate repayment of the entire outstanding balance.
- Additional Fees: Bridging lenders may seek to add charges such as late payment penalties, “account review” fees, and substantial renewal fees to the balance.
- Credit Damage: Defaults are reported to credit reference agencies, remaining on a record for up to six years and potentially hindering future borrowing.
3. Enforcement Actions: Receivership and Repossession
If a resolution is not reached, the bridging lender will likely take steps to recover the debt through the security instruments and mechanisms provided for in the facility letter and accompanying security documents such as:
- Appointment of Receivers: A Fixed Charge Receiver is typically appointed by a bridging lender, to recover debts owed by a borrower who has defaulted on a loan secured against property or land. The Fixed Charge Receiver’s role is to take control of and manage the charged property to protect the lender’s interest and recover as much of the outstanding debt as possible.
Typical powers that a Legal Charge would likely give to a Fixed Charge Receiver include:
- The power to sell the property
- Take possession of the property
- Complete any development of the property
- The power to lease and manage the property.
It is common that legal charges will include a provision which allows a Receiver to do anything that an owner of the Property may do but this is not always the case. It is important to note that although the receiver is appointed by the lender, the Receiver is the agent of the borrower, not the lender.
- Possession Proceedings: Lenders may apply to the court for a possession order to sell a property secured by way of a legal charge.
- Personal Guarantees: If the sale of a property / properties does not cover the debt, bridging lenders can pursue any personal guarantors for the shortfall.
4. Factors to Consider to Avoid Default
To mitigate risk, borrowers considering entering into bridging loans should conduct thorough due diligence before entering into a facility agreement and accompanying security documents and personal guarantees.
| Factor | Description |
| Exit Strategy | A realistic, executable plan for repayment (e.g., property sale or refinancing). |
| Plan B | A backup exit strategy in case the primary one fails, such as a fire sale or alternative asset disposal. |
| Loan-to-Value (LTV) | Maintaining a lower LTV provides a buffer against property value fluctuations. |
| Loan Term | Ensure the term is sufficient; underestimating project timelines is a leading cause of default. |
| Interest Structure | Choose between serviced monthly payments or “rolled-up” interest to manage cash flow. |
5. Potential grounds for challenging Bridging Loans
- Unfair Relationship (Consumer Credit Act 1974): Under Section 140A of the Consumer Credit Act 1974, a court can reconsider a loan if the relationship between the lender and borrower is “unfair”. This is a broad test that considers the lender’s conduct, the history of the relationship, and any acts or omissions before or after the agreement. If found unfair, the court has wide discretion to reduce interest rates or set aside terms.
- Regulatory Misclassification: Borrowers often challenge loans that were presented as “unregulated business loans” when they should have been “regulated mortgage contracts”. If a borrower or their close relative resides in the property, the loan typically falls under FCA regulation. Failure to regulate such a loan can potentially make it unenforceable without a specific court order.
- Misrepresentation and Conduct: If a lender or their agents made untrue statements to induce the borrower into the loan—such as false promises about the exit strategy or the nature of fees—the borrower may have a claim for misrepresentation. In the case of Houssein & others v London Credit Ltd & others [2025] EWHC 2749 (Ch), it was initially alleged that lender agents used photos to falsely claim a property was unoccupied.
- Clog on the Equity of Redemption: A borrower has an equitable right to repay their loan and get their property back. Any term that makes redemption “unreasonably difficult” or acts as a “clog” on this right—such as exorbitant exit fees or overly onerous redemption conditions—can potentially be challenged as unenforceable.
- Undue Influence or Duress: If a borrower was pressured into the loan under illegitimate circumstances or without independent legal advice, the agreement (or personal guarantees associated with it) might be set aside.
- Professional Negligence: In some cases, the dispute may lie with the professionals involved. For instance, if a solicitor failed to properly advise on the risks of high default interest or “technical” defaults, a borrower may have a claim for professional negligence to recover losses.
Summary Table of Challenge Grounds
| Grounds for Challenge | Primary Legal Basis | Key Focus Area |
| Unfair Relationship | Consumer Credit Act s.140A | Overall fairness of the lender’s conduct and terms. |
| Misclassification | FSMA (Regulated Activities Order) | Whether a business loan was actually a regulated home mortgage. |
| Penalty Clauses | Common Law (Makdessi test) | Whether default interest is “extravagant, exorbitant or unconscionable” compared to legitimate interest. |
| Clog on Redemption | Equitable Principles | Terms that unfairly prevent or hinder the borrower from repaying the debt. |
| Misrepresentation | Misrepresentation Act 1967 | False statements made by lenders or brokers prior to the agreement. |
Challenging Default Interest and Penalties
The Enforceability of Default Interest Rates
The enforceability of a high default interest rate (such as 4% per month) depends on whether the provision is a “penalty clause.” Under the landmark test from Makdessi, a clause is an unenforceable penalty if it is a secondary obligation which imposes a detriment on the contract-breaker out of all proportion to any legitimate interest of the innocent party in the enforcement of the primary obligation.
The Court of Appeal’s Position in Houssein:
The Court of Appeal clarified that a lender has a “legitimate interest in the performance of the contract” (i.e., the timely repayment of the loan), not just in being compensated for a breach. The court held that a default rate is only a penalty if it is “extravagant, exorbitant or unconscionable” in comparison to that interest. Crucially, the Court of Appeal found the High Court had erred by focusing too much on whether the lender had “justified” the 4% rate with evidence of specific costs; instead, the burden is on the borrower to prove the rate is “extravagant.”
The Importance of Context:
The Court emphasised that there is no “hard and fast” rule or specific percentage that constitutes a penalty. Whether a rate is “extravagant” must be assessed in the commercial context of the specific loan. For high-risk, short-term bridging finance, an uplift in interest upon default may be commercially justifiable to protect the lender’s interest in the prompt recycling of capital. The Court remitted the case back to the High Court to apply this test properly, noting that the 4% rate was not “automatically” valid or void.
Factors for Borrowers to Consider:
When challenging a default rate, the focus is on whether the provision is “penal” in nature—meaning its primary purpose is to punish the borrower rather than protect the lender’s legitimate interest. Key areas of contention include:
- The Burden of Proof: It is for the borrower to demonstrate that the rate is “out of all proportion” to the lender’s interest. The lender does not necessarily need to provide a mathematical justification for the specific rate chosen.
- Regulatory Misclassification: If a lender incorrectly categorised a loan as “unregulated” (e.g., a “business purpose” declaration was signed when the borrower intended to reside in the property), the borrower may have much stronger protections under the Financial Services and Markets Act 2000 (FSMA) and FCA Handbook, which can render interest terms “unfair” regardless of the penalty rule.
- The “Primary Obligation” Trap: If the higher rate is structured to trigger on a “non-breach” event, lenders may argue it is a primary obligation (not a penalty). However, courts will look at the substance over form to see if it is effectively a penalty for late payment.
When challenging the enforceability of bridging loans in a dispute, several legal and regulatory arguments beyond the “penalty rule” can be considered but it is important to obtain advice as early as possible.
Bridging loan dispute solicitors – Contact Us
David Burns, Senior Litigation Partner at Ronald Fletcher Baker LLP, has extensive experience handling issues related to bridging loan defaults and disputes. For enquiries on this topic, please get in touch with David Burns via email at D.Burns@rfblegal.co.uk or by phone at 0207 467 5751.
David Burns
Senior Litigation Partner
