Court of Appeal upholds default interest rate in loan agreement penalty clause challenge

Jasmine Harland, Solicitor

In the recent case of Houssein & Ors v London Credit Ltd & Anor [2026] EWCA Civ 830, the Court of Appeal confirmed that a default interest rate in a commercial loan agreement was enforceable and not an unlawful penalty. The decision gives lenders useful reassurance when negotiating and enforcing commercial finance terms where a borrower defaults.

Background to the loan agreement dispute

The dispute arose from a loan of just over £1.8million, granted by London Credit Ltd (LCL) to CEK Investments Ltd, supported by personal guarantees from Mr and Mrs Houssein, together with LCL taking charges over two properties owned by Mr and Mrs Houssein.

A dispute arose between the parties as to whether there had been an event of default due to breach of a non-residency provision. An event of default allowed LCL to accelerate the loan and terminate the facility, resulting in proceedings being commenced to seek repayment of the loan and interest. The standard interest rate was 1% per month, however, following an alleged event of default, LCL claimed default interest at 4% compounded monthly.

The borrowers argued that the higher rate was a penalty. The matter was referred back to the Chancery Court for reconsideration, where it was decided that the Default Rate was not a penalty and was enforceable. The borrowers appeal to the Court of Appeal has now been dismissed.

Was the default interest rate an unlawful penalty?

The key point is that the old “genuine pre-estimate of loss” test is no longer the focus. The question is whether the clause is out of all proportion to the innocent party’s legitimate interests. Here, the lender had a strong commercial interest in protecting itself against increased credit risk, preserving the borrower’s ability to repay and responding quickly to any deterioration in creditworthiness.

The Court of Appeal also stressed that it will be slow to interfere with a trial judge’s evaluative findings unless there is a clear error. There was none here. The judge’s conclusions were rationally supportable and based on the evidence.

What does this mean for lenders?

English courts are increasingly reluctant to strike down freely negotiated commercial terms as penalties, particularly where properly advised parties of comparable bargaining power have agreed them. For lenders, the decision is a helpful reminder that a robust default rate can be enforceable where it protects a legitimate commercial interest.

Practical takeaway: Clear drafting from the outset remains important. If a default interest clause is challenged, the lender will need to show why the rate protects a legitimate interest and is not out of all proportion to that interest.

If you are involved in a dispute relating to loan agreements, guarantees or the enforcement of default interest provisions, our dispute resolution team team can help. Contact us at [email protected], or on 0161 832 3434.