The knowledge of an employee is imputed to the lender and will affect enforceability. Default interest must have a legitimate basis.
The High Court has ruled in favour of a borrower in Houssein and others v London Credit Ltd and others [2023] EWHC 1428 (Ch), justifying the grant of an interim injunction restraining the sale of the mortgaged properties.
The case concerned the grant of a bridging loan secured over a group of five buy-to-let properties and a house. It was a term of the facility that neither the borrower nor any related persons should reside in the secured property. Shortly after draw-down the lender alleged default on the basis that the directors of the borrower company were living in the house.
One of the company directors died before proceedings began. The other alleged that she had been told by the intermediary that she would not have to move out of her home. The court believed her. Shortly before draw-down the intermediary and the lender’s business development manager visited the house and took staged photographs, which were forwarded to underwriters to secure approval of the loan. The director argued that it was obvious they were in residence at the time and had no plans to leave, which the court accepted. The evidence of the intermediary and BDM was dishonest.
The BDM knew that the directors were living in the house and his knowledge was imputed to the lender who, by continuing the transaction, had waived the non-residence condition in relation to the house. The borrower was not in breach of covenant so there was no contractual entitlement to default interest. The subsequent appointment of LPA receivers over the mortgaged properties was unlawful.
The judge also considered the 4% per month default interest claimed by the lender, which was four times the standard rate. It did not protect any legitimate interest of the lender for three reasons:
- A level of credit risk had already been priced into the interest rate of 1% per month under the loan and there was no justification for a further 3% increase.
- The default rate was the same regardless of the breach and was set without reference to the borrower or the particular loan. The loan was well secured.
- The same default rate applied to all breaches so the lender required identical protection for late payment and final judgments against the borrower in excess of £20,000, which could not be right.
A more typical default rate was 3% per month. Consequently, the default rate was a penalty and unenforceable.
Louise Clark is a property law consultant and mediator
