Bridging loan default interest: Enforceable or unenforceable? The Redetermination of Houssein v London Credit Ltd 

Giriş 

The boundary between a legally enforceable default interest rate and an unenforceable contractual penalty has long been a source of intense litigation in English commercial law. The long-running dispute in Houssein and others v London Credit Limited stands as a landmark case study in how courts evaluate short-term financing risks. Following a complex procedural journey involving a 2023 High Court trial and a subsequent 2024 Court of Appeal reversal, the case was remitted to the High Court. 

The resulting reconsidered judgment—handed down late in 2025 heavily analysed across the legal sector—fundamentally re-anchored how the landmark Cavendish Square Holding BV v El Makdessi test applies to modern bridging finance.  

In the redetermination, Deputy High Court Judge Richard Farnhill reversed his own original position, validating a steep 4% monthly default interest rate and providing a clearer framework for lenders and borrowers alike (albeit this decision is being appealed by the borrower so the matter is still ongoing).  

Factual Background and the Initial Dispute 

The dispute arose from a £1.8 million commercial bridging loan entered into in August 2020. The facility was extended by London Credit Ltd (LCL), an unregulated lender, to CEK Investments Ltd, a corporate entity controlled by Mr and Mrs Houssein. The loan was secured against a portfolio of five buy-to-let properties and the Housseins’ personal family home. 

The loan agreement was structured with two primary interest tiers: 

• A standard contractual interest rate of 1% per month. 

• A default interest rate of 4% per month, compounding monthly, triggered automatically by any “event of default”. 

Because LCL was an unregulated short-term lender, it was legally prohibited from residential mortgage lending to individuals. To remain compliant, the loan agreement contained a covenant dictating that neither the borrowers nor their immediate family could reside in any of the secured properties. 

The borrowers breached this non-residence provision and ultimately failed to fully repay the balance by the August 2021 maturity date. When LCL sought to impose the 4% compounding default rate, the Housseins’ initiated legal proceedings. They argued that a quadrupled interest rate was an extortionate, unenforceable penalty designed purely to punish them rather than compensate the lender. 

The Procedural Seesaw: From Trial to Remittal 

The legal path of Hussein has been uncommonly tortuous: 

In the initial 2023 trial, the High Court sided with the borrowers. The judge ruled that because the 4% default rate applied uniformly to any event of default—regardless of whether it was a minor technical infraction or a major non-payment—it could not be a genuine pre-estimate of loss. The court concluded the rate was disproportionate since LCL was already insulated by standard interest and physical property security. 

However, in 2024, the Court of Appeal overturned this ruling. The appellate court found that the trial judge had misapplied the core Cavendish doctrine by focusing too heavily on standard compensation.  

The Court of Appeal clarified that an increased default rate could be valid if it protected a legitimate commercial interest of the lender. Crucially, the Court of Appeal also warned that if the default rate failed the penalty test, the lender would be left with an economic void, as the standard interest rate would not automatically continue to run after the loan’s contractual term. The case was remitted to the High Court for an intensive factual redetermination. 

The Redetermination: Deconstructing the “Legitimate Interests” 

Upon rehearing the case with fresh expert evidence, the High Court fundamentally re-evaluated the lender’s exposure. In his updated judgment, Deputy Judge Richard Farnhill articulated five distinct categories of legitimate commercial interest that justified a uniform, heightened default interest rate: 

1. Repayment Interest: The basic commercial interest of any lender to ensure a loan is paid back on time according to its agreed parameters. 

2. Representations Interest: The lender’s reliance on the truth and ongoing accuracy of the representations and warranties given by the borrowers at the project’s inception. 

3. Security Interest: The fundamental requirement of a secured lender to ensure that the physical assets tied to the loan remain unencumbered, preserved in value, and legally realisable. 

4. Non-Residence Interest: Because LCL was an unregulated lender, a breach of the non-residence clause carried acute regulatory risks. The court recognized that a lender has a legitimate commercial right to use an elevated interest rate to deter breaches that could expose it to statutory penalties or enforcement actions. 

5. Credit Risk Interest: Short-term bridging loans are highly sensitive transactions. The court accepted new evidence showing that any marginal deterioration in a borrower’s credit profile (such as cross-defaults or unpaid judgments) dramatically jeopardises their ability to secure refinancing. Because refinancing is the primary “exit route” by which bridging loans are repaid, any elevation in credit risk directly threatens the lender’s capital return. 

The Proportionality Analysis 

Once the legitimate interests were established, the final hurdle under the Cavendish test was determining whether a 4% monthly compounding rate was extravagant, exorbitant, or unconscionable. 

Expert evidence presented during the redetermination indicated that the typical standard default rate across the bridging finance market hovered around 2% to 3% compounding per month. LCL’s 4% rate was undeniably high, sitting at the absolute upper extremity of what was commercially observable. 

Nevertheless, the court held that being at the upper limit of commercial practice does not necessarily equate to being unconscionable. Because the parties in the case were sophisticated commercial actors who had benefited from independent legal and brokerage advice, a strong presumption of contractual freedom applied. Given the fragility of the refinancing exit strategy and the specific regulatory dangers of the residential breach, the High Court ruled that the default rate was not a penalty and was fully enforceable. 

Commercial Impact and Legal Takeaways 

The High Court’s shift in Hussein has sent ripples through the bridging finance sector, reinforcing several critical principles for drafting credit agreements: 

• Validation of Uniform Default Rates: Lenders are not strictly required to meticulously graduate interest scales for different types of defaults, provided each underlying event of default connects back to a valid commercial interest (such as preserving the exit route or avoiding regulatory risk). 

• The Crucial Nature of the Exit Route: The judgment acknowledges the economic realities of bridging finance. The court’s willingness to accept that minor credit shocks can disrupt refinancing models provides lenders with a powerful tool to justify defensive default pricing. 

• High threshold for Borrowers Overturning Clauses: For commercial borrowers, the hurdle to prove “unconscionability” remains high. If an experienced borrower signs an agreement with professional advice, the courts will not be quick to intervene to adjust the bad economic consequences of a contractual breach. It is worth bearing in mind that each case turns on its own facts and it is still possible that default interest rates charged by bridging lenders may amount to an unenforceable penalty clause depending on the facts of each specific case.  

Conclusion and Next Steps 

The reconsideration of Houssein v London Credit Ltd provides some clarity in the legal landscape in favour of contractual certainty and lender risk mitigation. However, the saga is not entirely over. By an Appellant’s Notice filed on 12 January 2026, the borrowers launched a further appeal against the High Court’s late 2025 redetermination order. With a subsequent Court of Appeal hearing taking place in June 2026, the finance sector will continue to watch this case closely to see if this hard-fought clarity on default interest survives its next appellate challenge. 

Bridging loan dispute Solicitor, David Burns – Bize Ulaşın  

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 contact David Burns via email at D.Burns@rfblegal.co.uk  ya da 0207 467 5751 numaralı telefondan.