Bridging Loans: When are interest rates & charges unfair?

Bridging loan companies tend to be predatory and aggressively pursue debt recovery cases to the High Court to obtain an eviction notice once a borrower has defaulted on the loan. Members of our legal team are also insolvency and winding up petition experts so if our clients face winding up proceedings or appointment of receivers as a result of a mis-sold bridging loan we can quickly assist and advise in these areas. It is important to contact specialist bridging loan lawyers immediately because further delay means that the lender takes up all your equity in default interest and court costs.

What is a bridging loan?

Bridging loans are a temporary short term financing option normally with a maturity of less than 18 months secured against a property.

Bridging finance provides fast access to cash ordinarily used by a borrower purchasing a property to bridge the finance gap between the sale date of the current property and the completion date of the new property.

However, bridging loans are ordinarily a financing means of last resort given that they come with much higher interest rates than traditional mortgages and are typically offered by advisers, specialist bridging finance companies and mortgage brokers and are not normally offered by high street banks. Failure to repay a bridge loan will likely lead to repossession and very significant adverse costs consequences.

Why are bridging loans risky for a borrower?

Whilst personal bridging loans are regulated by the FCA, commercial loans secured against properties for investment are not. Therefore, commercial bridging is unregulated. Unscrupulous lenders may make incorporation of a company a condition precedent of a bridging loan, which on its’ face would means that the loan is unregulated and can lead to hidden charges.

Given the short term focus of bridging finance, bridging loans will also be more expensive and have higher interest rates than a traditional mortgage, typically alongside additional legal and administration costs.

When will a court find the credit relationship between a creditor and debtor is unfair?

The key statutory provision is found under section 140A of the Consumer Credit Act 1974. The Act enables the court to re-open credit agreements that give rise to unfair credit relationships.

The court may make an order under section 140B in connection with a credit agreement if it determines that the relationship between the creditor and the debtor arising out of the agreement (or the agreement taken with any related agreement) is unfair to the debtor because of one or more of the following—

1. any of the terms of the agreement or of any related agreement;
2. the way in which the creditor has exercised or enforced any of his rights under the agreement or any related agreement;
3. any other thing done (or not done) by, or on behalf of, the creditor (either before or after the
4. making of the agreement or any related agreement).
5. In deciding whether to make a determination under section 140 the court has regard to all matters it thinks relevant (including matters relating to the creditor and matters relating to the debtor).

In what circumstances will a court find that interest rates are unfair?

Although section 140B does not mention interest rates when defining when a relationship between a creditor and debtor might be unfair, it is clear from legal precedent that interest rates and charges are factors to be taken into account.

For example, in Patel v Patel [2009] EWHC 3264 (QB), an unfair relationship was found where the creditor charged an interest rate 3 times that of retail banks, compounded monthly, which was regarded as “exorbitant” and compounded in that case by a “lack of transparency” by the creditor.

In Chubb v Dean [2013] EWHC 1282 (Ch), a second charge short term bridging loan of £176,000 where the interest rate was 1.85% a month
compounded on a monthly basis, and what was described as a facility fee of 1.25% per month which was waived if the loan was repaid in full by a set date. The debtor argued that the facility fee amounted to additional interest and that the fee either in itself or in combination with the contractual interest made the relationship between the parties unfair. However, Judge Cooke found the interest rate was not unfair:

“The rate of interest, whether one adds the facility [fee] to it or not, is
high. It is not however, it seems to me, even in combination so high that it would lead the court to the conclusion that the relationship between the two parties to such an agreement was unfair even if the consumer was fully aware of all the terms that he was entering into. There may, of course, be such cases but it seems to me that that would require a very much higher interest rate than even the combination of these two amounts gives rise to in this case. What the defendants signed up to was a stiff commercial bargain, no doubt but it was not in my judgment an unfair one and the relationship that it created was not unfair by virtue of those terms”

Chubb and Bruce v Dean and Another [2013] EWHC 1282 (Ch), HHJ Cooke

Therefore, although a default interest rate of 3% per month (which followed the industry standard at the time) was “a stiff commercial bargain”, it was not penal or unfair. This of course leaves open the possibility that a court may find an interest rate higher than 3% to be penal in nature.

In addition, other factors persuaded the court in that case that 3% was not unfair such as the fact that the rate was clear on the face of the documents; it was not buried in small print; the borrower was legally advised; the borrowers were intelligent consumers; and they therefore must have known the stiff commercial bargain they were making. Thus, there is the possibility that if there is an agreement with the interest rate buried in the small print made, made with a non-sophisticated borrower, that a default interest rate which does not follow the industry standard, may be regarded by a court as unfair.

When will a court find that charges in a bridging loan agreement are unfair?

The size of charges levied by a creditor are definitely a consideration for a court in determining whether the relationship is unfair. In Holyoake v Candy [2017] EWHC 3397 (Ch) Nugee J confirmed:

“the size of charges made by a creditor to a debtor for further accommodation seems to me to be plainly something that can be taken account of in assessing the fairness of the relationship” [and s.140B(1)(a) and (c)] “expressly confer powers on the Court to require the creditor to repay part of a sum paid by the debtor or to reduce any sum payable by the debtor, and the obvious circumstances in which that would be appropriate would be if the Court thought that a particular charge that had been paid or was payable (a fee, or a rate of interest) was unfairly high”.

Holyoake v Candy [2017] EWHC 3397 (Ch), Nugee J

Precedent is clear that default administration fees can be unfair. In Greenlands Trading Ltd v Pontearso [2019] EWHC 278 (Ch), Nugee J, found that a secured a six month bridging loan with rate of interest of 1.45% per month (i.e. 17.4% per annum), with a £1,995 “default administration fee” and 3% per month default interest fee rate
to be paid on default, had an unfair default administration fee. Therefore, for reasons similar to case of Chubb v Dean above, the 3% interest rate was not unfair but crucially for purchasers of short term secured lender, a default administration fee is.

Why use a Specialist Bridging Loan Solicitor?

Bridging finance is a niche and complex subject matter which most generalist lawyers simply will not be familiar with or understand to a level adequate enough to be able to recognise and formulate a mis-selling claim. Our specialist lawyers are degree level educated in banking and securities law and have professional experience in both financial services regulatory auditing and in litigation against banks, brokers and advisers. This experience has been gained not only at other leading city law firms but at the legal and compliance departments of banks themselves. Our team will ensure your bridging loan mis-selling claim achieves the best possible result in terms of putting you back in the position your business would have been in but for the mis-sold bridging loan.

We work to achieve our client’s interests by attempting to negotiate with the banks, mortgage brokers or advisers wherever proper and commercially sensible to do so. When the time comes to issue legal proceedings we know how best to do so. If a without prejudice settlement approach is unsuccessful we seek on behalf of our client both litigation funding and after the event insurance policies and prepare and issue a claim without delay. Members of our legal team are also insolvency and winding up petition experts so if our clients face winding up proceedings or appointment of receivers as a result of a mis-sold bridging loan we can quickly assist and advise in these areas.

Case Study: Lender Default Charge of £150k Completely Defeated

Our client was ready, able and willing to redeem a bridging loan except that the Bridging Lender was unlawfully seeking payment of over £150k as a purported contractually agreed default fee (the Purported Default Fee).

Our view was that in fact the Bridging Lender was not contractually entitled to the Purported Default Fee under the Loan Agreement, and even if they were so entitled (which they were not) it would be deemed unlawful under the laws of England & Wales (for operating as a penalty and clog fettering our clients equitable right of redemption).

Our client instructed us on an emergency basis to seek (a) mandatory injunctive relief to permit redemption per the Agreement; (b) injunctive relief to restrain the lender from anticipatory breach of the Agreement; and (c) put the Bridging Lender on notice of an intention to commence legal proceedings to recover very substantial damages should the Lender breach the Agreement.

Our view after our initial fixed fee case review was that no such default fee was due whatsoever. Our advice was not to pay anything at all towards the Purported Default Fee as the contract contained unenforceable penal clauses. Our very robust approach against the Bridging Lender and their legal team worked and forced the Bridging Lender to back down such that our client saved the entirety of the Purported Default Fee.

Our Mis-sold Bridging Loan Lawyers get the best results

We endeavour to make the process as stress-free as possible for our clients and seek to eliminate the possibility of business or litigation failure. We know that each client’s case and business is unique, therefore we adopt a bespoke approach tailored to suit the client’s circumstances. We provide specialist senior legal advice from solicitors and barristers (including at QC level) at the outset when it absolutely matters in choosing the best strategy to follow. We are regularly instructed by regional solicitors’ firms to give specialist litigation advice and support in mis-selling cases. We assist by:

• Issuing legal proceedings & drafting documents/pleadings to support the bridging loan mis-selling claim;
• Assisting you in preparation of evidence to support your mis-sold bridging finance case;
• Appointing the right short term finance experts to ensure the best chance of success in litigation;
• Appointing forensic accountants to assess and report on the refunds and consequential losses due;
• Liaising with the defendant(s) and the Court and/or the Financial Ombudsmen Service;
• Providing first class Court representation and advocacy; and
• Developing (and aiding implementation of) strategies that allow the business to continue or ensuring bankruptcy steps are not taken.

Book an Initial Consultation with Our Financial Services Litigation Lawyers 

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 high value bridging finance mis-selling disputes. Our high profile and high value cases regularly appear in the national and international media. We have successfully managed and settled mis-selling court litigation against all major UK banks and regulated financial advisers.