As we move further into 2026 it is worth recapping the handful of decisions handed down by the courts over the course of 2025 that had an impact on the negotiation of corporate loans and which will be of relevance when negotiating your own loan and security documentation with funders. The two cases covered below are the decisions of the High Court in Houssein v London Credit Limited and the decision of the Supreme Court in Waller-Edwards v One Savings Bank.
Negotiating Default Interest
It’s long been a general principle that default interest charged by a lender in the event a borrower breaches a term of a loan agreement will only be enforceable if it is not a penalty. What is considered to be a penalty has been the subject of case law handed down by the courts over the years. Default interest is the interest that a lender is permitted to charge over and above the agreed day to day interest rate applicable to the loan and comes into effect in the event of a breach of a loan term. The attitude of the markets, guided by previous court decisions, is that the default interest level should be set at a level that reflects the risk to the lender in the event of a breach. Clearly that level will vary depending on the nature of the borrower, the security it offers as collateral, if any, and the potential implications of breach to the lender. In the wake of these decisions the market commonly adopted default interest rates of 1 or 2% over the usual rate of interest (whether that is calculated monthly or annually). Note that the frequency with which default interest compounds and is added to principal can also be the subject of negotiation.
In the Houssein v London Credit case the loan was to a corporate borrower in the form of bridging financing secured against a property portfolio. The borrower defaulted on the loan during the lifetime of the facility and though that default was resolved, part of the loan remained unpaid at the end of the facility term. That non-payment triggered a contractual default interest provision. The lender’s documentation allowed it to charge default interest compounding monthly at the rate of 4%. The defaulting borrower suggested that the rate was a penalty. The case was initially decided in favour of the borrower by the High Court. That decision was appealed by the lender and sent to the Court of Appeal and was then sent back to the High Court for the judge to determine whether 4% default interest was penal. The judge had witness evidence before him that suggested the standard market rate for default interest was 3% and so the question for him was whether 4% monthly was extortionate when viewed in the context of the normal loan rate of 1% for serviced interest and a market standard default rate of around 3%. In the event the judge, in the light of the new witness evidence, found in favour of the lender that the default interest rate was not extortionate given the risks to the lender.
So, when negotiating your own loan facilities do pay attention to the default rate that is applied. All too often borrowers and their counsel allow a higher than market rate through on the assumption either that default interest will never be invoked and also that if invoked then a higher than standard default interest would be judged to be a penalty and therefore unenforceable. The decision of the High Court, following the guidance of the Court of Appeal, suggests that this is not the case. The outcome of the case gave comfort to lenders and so should equally invite caution on the part of borrowers and their counsel when negotiating such facilities. However, if you are a lender or act for a lender the case, viewed in the whole, is not a ‘get out of jail free’ card for default interest. The application of the tests in arriving at the decision highlighted that default interest should be carefully weighed against each of the events of default that could trigger it to ensure that none would be considered to be disproportionate or extortionate. If you are a borrower or act for a borrower the case bolsters your ability to actively negotiate the default interest clause, pointing out that it is not sufficient to argue that the lender has a institutionally standard default interest rate.
Undue Influence Revisited
When seeking security or personal guarantees from spouses or partners it is well established that a lender should be on notice of the potential for undue influence. The case law suggested that a lender did not need to be on notice in situations of joint interest borrowing where each borrower’s interest aligns with the others. The steps required to be taken by a lender in cases where it was on notice of the potential for undue influence were set out in the Etridge decision – essentially that the guarantor must seek independent legal advice from a solicitor. The situation was less clear, however, in the case of hybrid purpose loans, where part of the loan was for the purpose of the joint business and a proportion was to be used for personal purposes for one party’s benefit.That was the case in Edwards-Waller where the Supreme Court decided to apply a so-called ‘bright line’ test. Put simply, if there is any lending for one party’s benefit above a de minimis threshold, the lender should automatically apply the Etridge principles and require the guarantor to seek independent legal advice.
That decision actually brings some clarity to situations involving hybrid loans. What it means practically for corporate loans, particularly to SMEs which can require personal guarantees from family members, is that independent legal advice will almost always be mandated by the lender. The diligence and legal processes will therefore need to factor this in with joint applications where the loan proceeds are not split 50/50 facing additional scrutiny. This highlights the importance of up-front discussions with prospective lenders, engaging with advisers early and of factoring the likely additional costs into the structure.
