Expert Witness Journal Dec 24 - Journal - Page 92
A Point of (default) Interest
by Kate Bowden - www.taylorwessing.com
A recent Court of Appeal judgment in the case of Houssein & Ors vs London Credit Limited
& Ors [2024] EWCA Civ 721 provides a useful reminder on the law of penalties in the
context of default interest and practical guidance for those drafting and negotiating documents
providing for default interest to be levied.
Lender had been aware, via its agents, that the Houssein family were in occupation of the Barnet Property
and accordingly had waived compliance with the
Non-Occupation Requirement, but also found that
the default interest rate specified to be payable under
the Facility Letter was an unenforceable penalty.
Background to the Case
The original case brought before the High Court
concerned the interpretation of the interest provisions
set out in a facility letter entered into between London Credit Limited (the Lender) and CEK Investments Limited (CEK) in July 2020 (the Facility
Letter). The loan made available to CEK was secured
by, inter alios, mortgages granted over certain properties owned by the directors of CEK, Mr and Mrs Ali
and Nuray Houssein, including a particular property
in Barnet, North London (the Barnet Property). The
Facility Letter contained a restriction on the Barnet
Property being occupied during its term and a representation from CEK that there was no intention for
anyone to occupy the Barnet Property (the operation
of these provisions being the Non-Occupation
Requirement).
One might consider this a victory for CEK and the
Housseins, however Farnhill J further determined
that interest continued to accrue under the Facility
Letter following its scheduled maturity date (in respect of sums which were, at such time, unpaid) but at
the standard contractual rate of 1% (the Standard
Rate) as opposed to the unenforceable default rate of
4% (the Default Rate).
CEK, Mrs Houssein and the Housseins' son (as
executor for Mr Houssein, who had since passed
away) (the Appellants) brought an appeal contesting
that Farnhill J had erred in his construction of the Facility Letter in determining that interest would continue to accrue following the scheduled repayment
date and that in fact no interest should have accrued
from such date, at either of the potential rates of
interest provided for in the Facility Letter.
In September 2020 the Lender wrote to CEK alleging
that the Non-Occupation Requirement had been
breached, as the Houssein family were residing in the
Barnet Property, and such breach constituted an
"Event of Default" under the Facility Letter. The
Lender claimed that as a result of the breach it was
entitled to levy default interest on the outstanding
amounts due under the Facility Letter until such time
as the breach was remedied. The Housseins however
continued to occupy the Barnet Property and CEK
did not pay the amount demanded as default interest.
The Lender brought a counter-appeal, contending
that the Default Rate was not a penalty and was therefore enforceable. The Lender agreed with Farnhill J
that interest continued to accrue from the scheduled
repayment date, but at the higher Default Rate rather
than the Standard Rate determined to apply by
Farnhill J.
In early November 2020 the Lender referred CEK
again to a breach of the Non-Occupation Requirement and demanded immediate repayment of all
sums outstanding under the Facility Letter. The sum
demanded by the Lender included an amount constituting default interest, and provided that default interest would continue to accrue at a daily rate of
around £2,500 until such time as the sums demanded
were paid. Over the coming months the Lender appointed receivers to exercise its powers under the
security over the properties mortgaged in its favour.
Terms of the Facility Letter
The critical provisions of the Facility Letter considered
by the Court of Appeal included:
l the Repayment Provision which held that interest
due on the loan should be paid, together with the outstanding principal amount and all other sums due
under the Facility Letter by noon on the Repayment
Date (being 7 August 2021), with the facility being
cancelled in full on the Repayment Date
The Housseins and CEK brought proceedings against
the Lender (the Original Proceedings) with a view to
stopping the enforcement process in respect of which
the key issues to be determined included:
l whether the Non-Occupation Requirement had
been waived such that there had been no Event of Default under the Facility Letter entitling the Lender to
charge default interest
l whether the default rate of interest provided for by
the Facility Letter was unenforceable by reason of it
being a penalty.
l the Standard Interest Provision which held that
interest would be payable on all outstanding amounts
under the Facility Letter at the Standard Rate
l the Default Interest Provision which held that
upon the occurrence of an Event of Default and/or if
the Borrower failed to repay any amount when due,
interest would accrue on the overdue amount from
the date the sum was due to be paid until the date of
payment at the Default Rate
l the EOD Provision which held both that on the
occurrence of an Event of Default the Lender could
demand immediate repayment of the loan together
with interest, and that any monies falling due for
The judge who heard the Original Proceedings, Mr
Richard Farnhill, determined on these issues that the
EXPERT WITNESS JOURNAL
90
DECEMBER 2024
