Summary
On 23 October 2025 the English High Court handed down its judgment in Houssein v London Credit Ltd, a case involving a loan dispute which followed a previous judgment from June 2023 (the First Judgment). The First Judgment was partially reversed by the Court of Appeal in 2024 (the Court of Appeal Judgment).
The Court of Appeal remitted certain factual and legal issues for further hearing. These issues, which are the subject of the present judgment, include whether the default rate of interest under a loan facility agreement between the parties (the Facility Letter) constitutes an unenforceable penalty. The latest judgment provides helpful guidance in the application of the test for unenforceable penalties, and is of particular relevance to lenders entering into agreements which contain default interest rate provisions.
Background
The dispute concerned a £1.8 million loan from an unregulated lender, London Credit Limited (LCL), to the third Claimant, CEK Investments Limited (CEK). The loan was secured by a debenture over CEK’s assets, personal guarantees from CEK’s directors (Mr. and Mrs. Houssein) and mortgages over five buy-to-let properties and the Houssein family home.
A key term of the Facility Letter prohibited CEK and “related persons” (including spouses and relatives) from occupying the family home. Before the loan was drawn down, LCL inspected the family home and found that members of the Houssein family were continuing to live in the property, in breach of the terms of the Facility Letter.
LCL had argued that this breach triggered the default interest clause in the Facility Letter, which was set at a rate of 4% per month (the Default Rate). The standard rate of interest was set at 1% per month (the Standard Rate). Although part repayment of £1.2 million had been made, the remainder of the loan (approximately £629,000 as of the contractual repayment date) remained outstanding and LCL demanded repayment of this sum plus interest at the Default Rate.
The previous decisions
In the First Judgment, the High Court ruled that the Default Rate constituted an unenforceable penalty as it did not protect any legitimate interest of LCL. The Court also found that the Standard Rate applied to any sums that were not repaid on the contractual repayment date.
The case was brought before the Court of Appeal which considered the key test under English law for penalty provisions, namely the test set out in Cavendish Square Holdings v Makdessi [2015] UKSC 67 as follows:
"The true test is whether the impugned provision 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”.
At [32].
The Court of Appeal found that the first instance judge had not correctly addressed the question of whether the Default Rate constituted a penalty, as the judge had not, amongst other things, considered whether the Default Rate was a secondary obligation which would be triggered upon breach of the primary obligation (namely, the repayment of the loan). The first instance judge had also failed to properly consider the lender’s legitimate interest and whether the Default Rate was extortionate, exorbitant or unconscionable.
The matter was therefore remitted back to the first instance judge for reconsideration.
The English High Court judgment
The Court accepted that both parties had characterised the Default Rate as payable only on the breach of a primary obligation. It followed that the Default Rate was a secondary obligation which was to be assessed under the rules on penalties.
The Court then identified the following five distinct categories of legitimate interests which would be protected by the Default Rate:
- Repayment interest: LCL’s legitimate interest in repayment of the loan.
- Representations interest: LCL’s legitimate interest in the representations and warranties given by the borrower as being true and correct in all material respects.
- Security interest: a secured lender’s legitimate interest in enforcing obligations for the protection of the security.
- Non-residence interest: an unregulated lender’s legitimate interest in seeing a non-residence provision observed.
- Credit risk interest: a lender’s legitimate interest in primary obligations that go to preserve a borrower’s ability to repay the debt when due.
Applying Cavendish, there was a “strong initial presumption” that the parties themselves were the best judges of what was legitimate provided they were properly advised and of comparable bargaining power. The Court accepted the defendants’ argument that the strong initial presumption arose in this case, on the basis that Mr. Houssein and his son (who was heavily involved in the matter) were both very experienced and had sought the advice of experienced solicitors and a mortgage broker before entering into the Facility Letter. It was also open to them to go to other lenders.
The Court then proceeded to objectively assess whether the Default Rate was extortionate in amount or effort in respect of each legitimate interest. Based on expert evidence, the Court noted that although the typical default rate in the market was 2-3%, higher rates did exist. The Default Rate was at the upper extremity of the band of “commercially acceptable rates” but was not, in itself, unreasonable. It therefore followed that, by reference to the strengths of each legitimate interest, the Default Rate was not penal.
For these reasons, the Court held that the Default Rate did not constitute an unenforceable penalty, and that LCL was entitled to recover both the outstanding balance of the loan and to charge the Default Rate under the Facility Letter.
Conclusion
The High Court’s judgment sets out a clear framework for the application of the Cavendish test on penalties, whilst also highlighting the importance for lenders to carefully consider default interest rate clauses on a case-by-case basis to ensure that they are proportionate and do not amount to penalty provisions.
The judgment is available here.
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