Nuray Houssein & Ors v London Credit Limited & Anor

A contractual right to prepay a loan requires payment in accordance with the agreement. A future proposal, conditional refinancing arrangement or settlement offer is not an effective tender and does not stop interest accruing. An implied term requiring a lender to accept such proposals will not be added where it contradicts express payment provisions or gives the borrower an indefinite interest-free extension.

Under [2015] UKSC 67, a default-rate clause is penal only where it is a secondary obligation imposing a detriment out of all proportion to the innocent party’s legitimate interests. Where one rate protects several primary obligations, each relevant interest must be assessed. A strong interest in timely repayment, preserving security, regulatory compliance and maintaining a viable refinancing route justified the rate in this case.

The judgment followed an earlier trial judgment, [2023] EWHC 1428 (Ch), aspects of which were reversed by the Court of Appeal in [2024] EWCA Civ 721. The matter was remitted for further findings concerning the enforceability of a 4% monthly compounded default rate and related repayment issues.

The claimants argued that their refinancing proposals were tenders or offers of payment which London Credit Limited was obliged to accept, or which engaged an equitable jurisdiction to stop interest. They also argued that the default rate was a penalty. The central questions were whether the communications constituted effective payment or tender, whether any term should be implied, whether equity intervened, and whether the default rate was unenforceable.

1. Repayment and tender. Clauses 5.1, 5.3 and 9 of the Facility Letter required actual payment in immediately available funds by the Repayment Date. The contractual right to prepay could be exercised by a compliant tender, including a tender conditional only on the release of security which the law would require upon repayment. A proposal dependent on obtaining finance, imposing settlement conditions or postponing receipt of funds was not payment under the Facility Letter.
2. Communications. The claimants’ communications were, at most, contractual offers or invitations to treat aimed at settling the wider dispute. They were not unconditional tenders. The May 2021 payment of £1.2 million was effective, but the other proposals did not stop interest accruing. LCL was entitled to reject offers seeking concessions on default interest, receivers’ costs or security arrangements.
3. Implied term and equity. No broad term requiring LCL to accept offers, facilitate refinancing or refrain from enforcement could be implied. It was inconsistent with the express requirement for immediately available funds and was neither necessary for commercial coherence nor obvious. A narrower duty to provide account details or release security might arguably arise, but it was unnecessary to decide the point because those steps had been arranged when requested. Equity could intervene in exceptional circumstances where a mortgagee rejected or delayed a properly supported repayment, but it did not require acceptance of non-compliant proposals on these facts.
4. Penalty rule. Applying [2015] UKSC 67 and the three-stage approach in [2017] EWHC 350 (Ch), the court asked whether the default rate was a secondary obligation, identified the legitimate interests protected by it, and assessed whether the rate was extortionate. The assessment was made objectively at the time of contracting. The rate was a secondary obligation.
5. The relevant interests included timely repayment, the truth of representations and warranties, preservation of security, compliance with the non-residence requirement and protection against credit risk. The same rate applying to several obligations created a presumption of penalty, but no more than a presumption. The court distinguished descriptive credit risk following an actual payment default from predictive credit risk concerning the future viability of refinancing.
6. The evidence showed that the refinancing was finely balanced. Even a small deterioration in creditworthiness, interest cover or security value could make refinancing fail and force enforcement. The 4% rate was above ordinary market rates but remained within the range justified by LCL’s strong legitimate interests. It was therefore not extortionate, extravagant or unconscionable and was enforceable.
7. The alternative claim for statutory interest under section 35A of the Senior Courts Act 1981 fell away. The outstanding balance remained due, and default interest accrued from the contractual Repayment Date.

• High Court: The first judgment was given on 12 June 2023, [2023] EWHC 1428 (Ch).
• Court of Appeal: Aspects of the first judgment were reversed and certain issues were remitted, [2024] EWCA Civ 721.
• High Court: The remitted issues were determined in the present judgment. The default rate was held enforceable.