Bridging Loan Case Study: McDonald v London Credit – Default Interest Rate – Unenforceable Penalty

We have again successfully represented a bridging customer in a significant settlement win against another bridging lender. This time, London Credit Limited (an unregulated tertiary bridging lender) was forced to agree to our client’s settlement terms which were for payment of a fraction of the amount sought by the bridging lender for which they already had judgment for. This is not the first time that London Credit Limited’s lending practices have come under scrutiny from the High Court and we discuss below the case of Houssein v London Credit (2023) PT-2021-000393 alongside McDonald v London Credit (2023) KB-2023-001086.

Bridging lenders operating in unregulated lending waters are often denigrated by borrowers who label them ‘loan sharks’. Frequently, that nomenclature arises as a result of the very high rates of default interest and other lending tactics and fees which are applied by unregulated bridging finance providers upon an event of default. Unfair treatment and fees can and should be challenged – for more information see our guide “Bridging Loans: When are interest rates & charges unfair?“

Houssein v “London Credit Limited” [2023]

In this recently reported decision: Houssein v London Credit Limited [2023] EWHC 1428 (Ch), it was found by the High Court that a broker and the lender’s business development manager used photos to falsely claim that the secured house was empty when in reality they knew it was the borrower’s home and was occupied by the borrower. One has to wonder if and on how many occasions they had got away with this sort of tactical misconduct before?

If those circumstances were not bad enough, the High Court also went on to consider “London Credit” Limited’s default interest rate. The default interest rate that the lender applied on an event of default in the Houssein case, and in this case study, was 4% per month, which quadruple the “standard”, non-default, interest rate of 1% per month.

Richard Farnhill, sitting as a Deputy Judge of the High Court, found that the 4% per month default interest rate was penal, and therefore unenforceable, since it did not protect a legitimate interest of London Credit Limited. Consequently, the Court found that London Credit Limited’s default interest rate was an unenforceable penalty.

UPDATE - Houssein v London Credit Limited: By Appellant’s Notice filed on 10 October 2023, the appellants appealed the 19 September 2023 order of Richard Farnhill sitting as a Deputy High Court Judge in the Business and Property Courts, following trial, in which he made a declaration regarding contractual interest payable and made costs orders on an issue by issue basis [Court of Appeal Judgment].

London Credit‘s 4% Default Interest Rate held to be an Unenforceable Penalty

In concluding that the 4% interest rate was an unenforceable penalty, the Court took into account the following factors:

• Firstly, the same default interest rate applied no matter what the breach of the agreement was. For instance, a breach of a residency requirement would trigger the same rate of default interest as a breach of a payment term. In those circumstances, it could not sensibly be argued that the default interest rate protected London Credit Limited’s legitimate interest in ensuring that it was paid on time in the event of a payment default.
• Secondly, the borrower’s credit risk had already been priced into the loan when the standard interest rate was set at 1% per month. An increase of 3% per month on default could not, therefore, be justified.
• Thirdly, the default interest rate was set centrally by London Credit Limited, without reference to the particular loan or the particular borrower’s circumstances.
• Finally, the expert evidence in the case led to the conclusion that a default interest rate of 3% per month was more the norm; as opposed to the 4% per month charged in this case.

McDonald v “London Credit”: Applications to Set Aside Default Judgment and Statutory Demand

Lexlaw was instructed by another client of London Credit Limited, Mr McDonald, who had entered into a bridging loan facility with London Credit secured on property in his buy to let portfolio. At the time of our instruction, London Credit had obtained a default judgment against Mr McDonald for some £157,663.47. The majority sum of the default judgment comprised default interest and default charges which had been added to the loan by London Credit Limited.

Having obtained default judgment, London Credit Limited had instructed its legal team, led by Chris Jones of Gunnercooke LLP, to take aggressive enforcement action against Mr McDonald. This included serving a statutory demand based on the default judgment for a sum over £161,000.00; and, incongruously, applying for three charging orders over other buy to let properties which formed a part of Mr McDonald’s buy to let portfolio.

Lexlaw, acting on Mr McDonald’s behalf, applied to set aside the default judgment obtained by London Credit on the discretionary ground that Mr McDonald had a reasonable prospect of defending the claim. A detailed draft defence was served which identified three key grounds upon which the London Credit Limited claim was subject to challenge:

• That the sum sought ought to be significantly reduced as the majority of it was made up of default interest charges, which were unenforceable penalties.
• That the loan was, on a proper analysis, a regulated mortgage contract within the meaning set out in the Financial Services and Markets Act (Regulated Activities) Order 2001. Consequently, the loan was unenforceable against Mr McDonald absent an order from the Court to the contrary.
• That the lending relationship between Mr McDonald and London Credit Limited was unfair pursuant to the terms of the Consumer Credit Act 1974.

We prepared detailed evidence and detailed legal argument to support the above assertions. The application to set aside the default judgment came on for hearing before a learned silk, Sarah Clarke KC, sitting as a Deputy Judge of the High Court. London Credit Limited resisted the application to set aside the default judgment on all grounds.

Court Decision in McDonald v London Credit – Judgment Set Aside

The Court determined that it was compelled to conclude that Mr McDonald had a real prospect of defending the claim, not least given the existing authority, Houssein v London Credit Limited, which tended to show that the default interest provisions applied by London Credit Limited were penal. The Court also accepted that there was a real prospect of Mr McDonald defending the claim on the other grounds pleaded in the draft defence. Consequently, the Court set aside the default judgment in the sum of £157,663.47 and gave directions for the rest of the matter to be determined.

Costs were ordered to be “in the case”; which is unusual given that the default judgment was set aside on the discretionary grounds, perhaps signalling the Court’s lack of approval for the lending and aggressive enforcement tactic’s deployed by London Credit Limited.

As a result of the default judgment having been set aside, Lexlaw were also successful in ensuring that the statutory demand was set aside with no order as to costs; and the three interim charging orders obtained by London Credit Limited were also set aside on the same terms.

McDonald v London Credit – Forcing the Bridging Lender into Settlement

After the default judgment had been set aside, Lexlaw’s team of Financial Services Litigation in-house solicitors and barristers carefully considered the best strategy to bring the claim to a conclusion on the most advantageous terms for Mr McDonald. Recognising that the Court’s usual approach to unlawful loans and penalties still requires the capital sum to be repaid together with interest at the standard contractual rate, a CPR Part 36 offer to settle the claim was made early at the most opportune time to create opponent litigation pressure.

A Part 36 Offer is an offer to settle all or part of a claim which complies with the requirements in Part 36 of the Civil Procedure Rules (CPR). Making a Part 36 offer provides a means of putting pressure on the other side to settle a case and protects a party’s position on costs.

The offer made was in essence to pay interest at the standard rate, as opposed to the default rate, from the date of default until the date of payment under the Part 36 offer. This offer was ultimately accepted by London Credit Limited who no doubt felt under immense pressure having just lost their default judgment, being forced to withdraw their statutory demand and their three charging orders as well as the previous Hussein case.

Consequently, Mr McDonald paid just £68,577.23 to settle the claim, which represented unpaid simple (not compound) interest on the standard rate as opposed to the default rate, a saving of £89,086.24 on the default judgment sum obtained by London Credit Limited.

This outcome represents a very significant win for our client, and demonstrates how unfairly high, default, penalty charges imposed by tertiary lenders and bridging lenders can be successfully challenged.

Lexlaw Bridging Client Review

“After failing to meet the repayment deadline for my bridging loan with ‘London Credit’, they sought to impose excessive interest rates. Furthermore, they engaged solicitors to exert pressure, compelling me to relinquish control of all my assets under the threat of bankruptcy and subsequent underselling at auctions.“

“Concerned about London Credit’s coercive tactics, I engaged LEXLAW to scrutinize my case and ensure that I incurred only reasonable charges. LEXLAW conducted a thorough examination, promptly determining that ‘London Credit’ was overly zealous in their pursuit of the debt. They explained my defense options and the corresponding legal frameworks efficiently, successfully defending against London Credit’s attempts to levy charges on my assets and pursue bankruptcy in court. Consequently, ‘London Credit’ had little recourse but to settle the claim out of court for a significantly reduced, mutually agreeable amount.“

“Thank you for all that you have done for me I cannot thank you enough for the stress you removed from my life the moment you took control.”

Mr McDonald – Bridging Loan Customer

Examples of Potentially Unfair Terms

Default interest rates are not the only example of penalty charges which can be challenged. The leading case on contractual penalties is Cavendish Square Holdings BV v Makdesi [2015] UKSC 67. There, Lord Neuberger put the test for whether a contractual term amounts to a penalty in the following terms:

“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. The innocent party can have no proper interest in simply punishing the defaulter. His interest is in performance or in some appropriate alternative to performance.”

Lord Neuberger in Cavendish Square Holdings BV v Makdesi [2015] UKSC 67

Other common terms in bridging loans or finance agreements which are potentially unfair include; (a) administrative charges which are applied in the event of a default; (b) increased exit fees which only apply where there is a default; (c) “renewal” charges which are levied when there is a failure to repay the loan by primary repayment date; (d) cross-default clauses which have the effect of defaulting other loans provided by the same borrower, but secured over different assets, despite there being no separate event of default in that lending; and (e) accelerated payment clauses which apply in the event of default.

We have experience in successfully challenging many different types of default clauses; resulting in the sum sought by lenders being significantly reduced or, in some instances, extinguished all together. If you have been sold a bridging loan by London Credit Limited, or any other bridging lender, and would like a review of your specific case, please contact us to book a consultation with our expert bridging finance lawyers.

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Our Financial Services Litigation team of Solicitors and Barristers in London are highly experienced in mis-selling litigation and specialise in representing SMEs, high net worth individuals and companies in unfair relationship claims. Our high profile and high value cases regularly appear in the national and international media and our team have successfully managed and settled litigation against all major UK banks.

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