PT-2021-000393 - [2025] EWHC 2749 (Ch)

There was a disagreement between the parties both as to what the Default Rate was, at least in the first year of the Loan, and what the ratio was between 4% compounded monthly, the Default Rate, and 3% (compounded monthly), which the experts had agreed was a reasonable default rate in the market at the time.

Taking first the issue of what the Default Rate was, this was a consequence of the way that the Facility Letter dealt with interest. The Loan amount was £1.881 million, which included the full annual interest at 12% totalling £225,720. Significantly, the interest element was capitalised on day one but, under clause 6.1 of the Facility Letter, interest accrued on a daily basis. There is an element of tension between that provision and clause 6.3, which provided that the full amount of interest was to be “due and payable” on the Drawdown Date. That may be thought to suggest that the concepts of what is due and what is payable are distinct, meaning that all interest was both legally due and payable as at the Drawdown Date. The parties agreed, however, that the proper interpretation of the two provisions read together was that interest had to be funded upfront but that LCL’s right to retain that interest depended on when the Loan was repaid; if it was repaid before the Repayment Date, interest would cease to accrue from actual repayment, reducing CEK’s liability. I have already addressed the rules on contractual interpretation. On a straightforward application of those rules I agree that is the proper reading of those two provisions. Parties do, at times, use the term “due and payable” as a composite term meaning simply payable, and any other reading would make the express provision on accrual of interest meaningless.

That result is reflected in the terms of the order that followed my First Judgment, which specified the capital amount due from CEK as at the Repayment Date as being £629,991.79. That figure was, as one might expect, calculated and agreed between the parties, but it can only be correct if the £1.2 million part payment in May 2021 stopped interest running on that part of the Loan. The parties’ conduct is not relevant to the interpretation of a contract, of course, but where an issue has been resolved by a court order the matter is res judicata and cannot be reopened as between those parties. Both parties accepted that was the case here, even were the point one that might otherwise have been in dispute.

Against that backdrop one comes to consider the Claimants’ rolled up interest argument. In his Report, Mr Griffiths noted that the Default Rate was applied to the whole of £1,881 million, even though, at the date of the alleged default, a significant portion of that that amount had not accrued and so was not part of the amount properly owed to LCL. The effect of this was to inflate the Default Rate, because 4% charged on £1.881 million equated to 5% charged on the sum due from CEK on 7 September 2021 when a default was declared.

Mr Cowen submitted, and I accept, that Mr Griffiths was not challenged on that calculation at the trial. Neither expert was recalled for this hearing. As such, his evidence as to the calculation stood unchallenged and I should accept it.

Mr Wheeler submitted that this was not what had happened, and referred me to the redemption statement issued by LCL to show how default interest was calculated. I had a number of reservations about this. First, I accept Mr Cowen’s point that this was never put to Mr Griffiths, and if his calculation was to be challenged on this basis he should have had the opportunity to respond to that challenge. Secondly, looking at the redemption statement it seemed to me that it showed that LCL was indeed seeking to charge default interest on the full sum of £1.881 million, which was rather Mr Griffiths’ point. Finally, and critically, what LCL actually did was irrelevant to the assessment of penalty, which as I have repeatedly noted is asked at the time the agreement is entered into. The question is what it had a right to do, and that, too, is decided at the time of formation and without reference to the parties’ subsequent actions (Chitty paragraph 16-061, referencing James Miller & Partners v Whitworth Street Estates (Manchester) Ltd [1970] AC 583 at 603).

This fed into Mr Wheeler’s second, and I felt much stronger, point: if LCL had charged default interest on the full amount and not the amount due then it had done so in error. Specifically, he conceded that the correct sum on which Default Rate was to accrue under the Facility Letter was capital plus interest accrued at the date of any default. I accept that.

The effect of that concession, it seems to me, is to render the Claimants’ rolled up interest point unarguable. It remains the case that Mr Griffiths’ calculation is unchallenged; I therefore accept that if the Default Rate of 4% compounded monthly were charged on the full £1.881 million from 7 September 2020 it would be the equivalent of charging 5% on the actual sum due over the first year of the Loan. That is wholly academic, however, because LCL had no right to do that; under the terms of the Facility Letter it could only charge the Default Rate on the accrued interest. The question of whether the Default Rate is extortionate turns on what LCL had a right to charge – 4% – not what it might, in fact, have charged.

The second maths problem for the closing day of this hearing concerned the abstract operation of powers. Mathematics is an area calling for particular precision, and it is easiest and fairest simply to quote Mr Cowen’s point:

Mr Wheeler rejected this. The ratio between 3% compounded monthly and 4% compounded monthly would, he submitted, turn on the number of instances of compounding.

I agree with Mr Wheeler. The point can be illustrated with the difference between the linear dimensions, area and volume of a square and a cube. Assume the linear dimensions of the square and the cube are 2cm. The area of the square is 4cm²; the volume of the cube is 8cm³. Where the length of the sides increases to 3cm the area of a face is 9cm² and the volume of the cube is 27cm³. Increasing the power produces a non-linear increase in the output. The length difference in any dimension (power of 1) between the smaller and the larger cubes is 150%; the difference in their respective areas (power of 2) is 225%; and the difference in their respective volumes (power of 3) is 337.5%. The ratio of 2¹ and 3¹ is not the same as the ratio of 2² and 3², and both are different to the ratio between 2³ and 3³. I do not see why it would make any difference that the rates here were expressed as percentages; a percentage can readily be expressed as a decimal fraction (on the facts of this case, 0.03 and 0.04) in exactly the same way that my cubes could be expressed in terms of metres rather than centimetres (0.02 and 0.03) and I see no reason why such a fraction should behave any differently to an integer for these purposes.

It may be that the point goes nowhere. As I have noted, Mr Cowen accepted that if one applied the compound interest formula to a sum of money then Mr Wheeler had a point. In my view, Mr Wheeler had a point in any event, but since this is a practical rather than a theoretical exercise it may be that there is agreement on it. To the extent there is not, I accept LCL’s case; in my view the number of instances of compounding was critical to the scale of the difference between 3% and 4%. In the cold, hard language of money, if the Claimants had repaid soon after default, the difference between 3% and 4% would have been far less significant than it is now.

It will be recalled that at paragraph [35] Lords Sumption and Neuberger stated that there was a “strong initial presumption” that the parties themselves were the best judges of what was legitimate provided that they were properly advised and of comparable bargaining power. A similar point was made by Lord Mance at paragraph [152]. Both judgments were referred to with apparent approval by Bryan J in Cargill at paragraph [74].

Mr Wheeler submitted that this was just such a case: Houssein Houssein had recognised in his evidence that he and his father were “very experienced”. I had accepted that in my First Judgment. They had the advice of experienced solicitors and also of a mortgage broker. Finally, it was always open to them to go elsewhere – LCL was not the only show in town. In the circumstances, he submitted, the “strong initial presumption” arose.

Mr Cowen urged me to reject that submission. He noted that the Housseins were under time pressure to refinance due to the impending expiry of the Bridge Loan. Moreover, while it might have been the case in principle that there were options Andreas Liondaris only put forward LCL, such that in truth it was the only show in town. Finally, by the time the Default Rate became apparent to them, which might have been as late as 20 July when the Bridge Loan expired, they really had nowhere else to turn. That time pressure, the anxiety that Houssein Houssein and Mr Houssein felt as a result and the connected lack of options undermined any suggestion of equality.

I accept Mr Wheeler’s points for six reasons:

Obviously the Claimants have other arguments, which I will address, but what the Claimants’ position on this particular issue amounts to is saying that because they did not approach LCL in, for example, early June LCL loses the benefit of the “strong initial presumption” to which it would otherwise be entitled. It would be remarkable, and highly undesirable, if the question of whether the Default Rate was or was not a penalty turned, even in part, on when LCL was first approached.

An immediate difficulty here arises with a mismatch between the way that the law approaches this question and the way that the expert evidence was presented at the trial. As I have set out, the law requires the identification of a primary obligation and the legitimate interest in its enforcement, followed by an assessment of whether, by reference to that interest, the provision in question is extortionate. As I have noted, Mr Cowen submitted, and I accept, that where there are multiple primary obligations subject to a provision like the Default Rate one must assess that provision by reference to each of the primary obligations, or at least by reference to the legitimate interests that underlie them since multiple primary obligations may involve the same interest, as is the case here. If, by reference to any one interest, the provision is extortionate it fails in relation to all of them.

By contrast, the experts presented the issue holistically, looking at what rates were typical in the market. In the case of Mr Kyriacou that was understandable, since he had not encountered dynamic default rates and so could only give evidence as to static rates. He did accept that a dynamic rate reflecting risk would be preferable.

Mr Griffiths had come across dynamic default rates, and I accept his evidence that such rates were offered for the reasons I have already given. He did not, however, expand on what those rates were or tie his obvious concerns about the operation of the Default Rate here to specific primary obligations in the Facility Letter.

Against that backdrop it seems to me that the proper way to address this question is to engage with the experts’ evidence in the terms it was given, which is essentially to ask whether a 4% rate would ever not be extortionate. If in some cases it would not be extortionate the question then turns to the strength of the interests I have identified, on which Mr Griffiths offered some insight at the trial but as to which the position became significantly clearer at this hearing.

Before addressing the specific interests, it is worth noting what seems to me a consequence of a focus on rates by both experts. The total cost of borrowing, whatever its shock value, does not contribute a great deal to determining whether the default rate is oppressive. The Loan was never intended to be a long-term financing option. The evidence at trial was that the Housseins were in a difficult position, in part due to their own credit position with historic difficulties with unsatisfied County Court judgments and seeking to re-re-bridge an existing re-bridging loan. Mr Kyriakou considered the latter point to be unusual and particularly significant. Mr Griffiths was less concerned by a loan being a re-bridge, noting that almost 39% of bridging loans are first re-bridges, but did not comment on the typicality or otherwise of re-re-bridging. The Housseins were also in difficulty due to the short timeframe they had to refinance which was made more acute by the disruption caused by the Covid-19 pandemic.

What they wanted was, in credit terms, a pause for breath, a short-term solution to allow them to take stock before moving forward. There was always likely to be an interest rate premium for that. The Loan was for a term of one year but part of it remains outstanding over five years later. The inefficiency of using a short term solution for the purposes of medium to long term financing is unsurprising; the same outcome would result from paying the minimum balance on a credit card.

One sees this on the figures. The Claimants make the point that the interest on the outstanding capital of fractionally under £630,000 amounts to around £3.8 million. That, obviously, is a very significant liability, but even at a rate of 3%, which both experts agreed was reasonable and in line with the rest of the market, the figure would be approaching £3.1 million. The output is simply a mathematical function of the inputs. If the inputs are reasonable, it is not clear to me how the output, just by operation of mathematics and the Claimants decision not to repay, becomes unreasonable. The experts focussed on the rate and it seems to me that I should do likewise.

In terms of whether a 4% rate was extortionate, Mr Kyriakou’s view was that it was not. He recognised during his cross-examination that it was high, and certainly above the range of typical rates that he had identified.

On at least one level the rate was abnormal: LCL was the only lender of those identified by Mr Kyriacou who charged a default rate of more than 3%. That, of course, does not of itself show that the Default Rate was extortionate.

Mr Griffiths’ evidence requires a more forensic analysis. In saying that I mean no disrespect to him; his evidence was clear at every stage. He has, however, been involved at a number of stages and the focus at each was different.

The starting point comes before trial, in his expert report he prepared for the application before Falk J to which I have already referred. That earlier report, as Mr Wheeler noted, was then incorporated by reference into his evidence for trial. Mr Griffiths observed:

I pause simply to note, in connection with his last point, that since Makdessi there has been no difficulty with a rate being imposed as a deterrent. Mr Griffiths continued to observe that he would expect the default rate to be double the standard rate.

He returned to the issue in his expert report for trial. At paragraph 3.90 Mr Griffiths addressed the band of “commercially acceptable rates” and considered that “4% appears to be, at best, at the upper extremity of that band and is outside it (the actual rate initially applied also appears to have been 5%...)”. Two points arise from this, it seems to me. The first is that, as Mr Wheeler submitted, something cannot simultaneously be at the upper extremity of a band and outside it. It is obvious that Mr Griffiths thought that 4% was at the limit of what was commercially acceptable; it is less clear whether he thought it went beyond that. By contrast, he plainly thought 5% was wholly unacceptable, but for the reasons I have given, if that figure were ever in play (and in my First Judgment I did not rely on it), Mr Wheeler’s concession at this hearing has rendered it irrelevant.

There followed the Joint Statement of Experts. Issue 2 was “Whether the default interest rate charged was in line with the market and/or reasonable in the circumstances”. The response was: “It was agreed that in comparison with the market, and when comparing LCL with similar lenders, 3% per month would be more in line.” Mr Griffiths repeated his point about the effective rate was 5% for the first 11 months.

By this stage, then, the consensus between the experts was that a 3% default rate would be “more in line” with the market. The Joint Statement did not go so far as to say that 4% was out of line with the market or unreasonable; it simply did not comment on it at all. Mr Griffiths obviously remained troubled by a 5% rate.

The issue arose again in Mr Griffiths’ cross-examination. Having described 4% as “very high” he observed that: “Mr Kyriakou and I were really hovering around the 3%.” He then returned to the 4%:

The test for penalty had not been put to Mr Griffiths at that stage and I did not and do not take him to be saying that the legal standard was met. On the contrary, in his Report he very fairly acknowledged that this was a matter for the court, not for him.

There was a further exchange about the range of default rates in the market, which was 2-3%. Mr Griffiths then addressed where higher rates were appropriate in his view:

The legal test for penalty was then put to him:

Mr Wheeler submitted that Mr Griffiths had avoided the question in respect of the 4% rate and focussed, instead, on the 5%. If that was meant as a criticism of Mr Griffiths I do not accept it, nor do I accept that he avoided the question. The reference to “it’s a high rate” could have been to the 4% or the 5%. Mr Griffiths was entitled to take it to mean either and he was clear in his answer that he was focussed on 5%.

I do take Mr Wheeler’s point, however, that what this means is that Mr Griffiths did not address in his answer whether 4% was extortionate. The one time he therefore directly addressed it was in his Report when he described it as “at the upper extremity of [the band of commercially acceptable rates] and is outside it”. As Mr Wheeler observed, it cannot be both; it seems to be that what was meant is that it was at the borderline of commercial acceptability.

He addressed the question somewhat indirectly when he said that quadrupling the rate was “excessive”; he further explained that doubling the rate was his rule of thumb. Mr Cowen noted that this was consistent with what HHJ Hodge QC suggested in Ahuja, where he considered that anything beyond a doubling at least called for an explanation. There are, I think, two important qualifications to that. First, as Mr Wheeler cautioned, HHJ Hodge QC made clear that his point was made against the backdrop of the evidential vacuum he faced – he was not told what market rates were; I was. Secondly, any explanation would be the start of the investigation not its end-point because the assessment is objective. It seems to me that means that if the evidence as a whole offers a basis for a higher rate that could in itself be sufficient, even where the defendant has not advanced a reason.

I take from Mr Griffiths’ evidence the following points:

Taking into account the “strong initial presumption” from paragraph [35] of Makdessi, to which I have found LCL was entitled, I regard 4% as being plainly above the range of market rates but not, in itself, unreasonable. If the primary obligation gave rise to a limited legitimate interest in its enforcement the Default Rate could still be considered extortionate, but for a stronger interest that would not be so.

Turning to the interests, the Repayment Interest is, as I have said, a very strong interest. I wholly accept what Mr Wheeler says that it is the sine qua non of a loan from the lender’s perspective. The Court of Appeal Judgment makes the important point that the interest is not simply in repayment but in timely repayment. As I have noted, Lordsvale, Cargill and Ahuja were all cases relating to the Repayment Interest, and as I have further noted they all recognised that some uplift in the interest rate is appropriate in respect of a defaulted payment.

Balanced against that I accept that all this would equally be true for any other lender, but no other lender had a default rate at this level. It is, to use Mr Griffiths’ term, at the upper extremity of the band of commercially acceptable rates. Given the strength of this interest it does not, in my view, go beyond that, however. It is high, not extortionate. By reference to the Repayment Interest, the Default Rate is therefore not penal.

The Non-residence Interest is also a strong interest. For an unregulated lender, like LCL, to provide loans to individuals secured on their primary residence could have catastrophic consequences. Penalties under the Financial Services and Markets Act 2000 include, presumably for the most extreme cases, unlimited fines and up to two years’ imprisonment. Mr Theophanous was not asked about the percentage of defaulted loans he had experienced during his career, but I suspect he and certainly most lenders are realistic enough to recognise that it is an occupational hazard; I do not believe they would see fines or imprisonment in the same light. The point was made graphically by Mr Griffiths in his cross-examination. Certain risks he accepted with a degree of equanimity – even fraudulent loans were something he saw as a regular problem for any lender. He was nowhere near so sanguine when it came to an unregulated lender making regulated mortgages:

The starting point, in my view, is that a lender’s interest in protecting itself against the “absolutely horrific” is a strong one. Even a low probability risk can merit strong protection when it relates to a high-impact outcome.

As I noted above in identifying the Non-residence Interest, LCL’s protection was not limited to the Default Rate. The loan had been made to a corporate entity, CEK, which in and of itself would take the loan out of the regulated regime. That is obviously relevant, and indeed seemed to me conclusive in my First Judgment. I accept that my approach there did not properly deal with the residual risk. I am particularly conscious of the way that Mr Griffiths addressed the point in cross-examination:

He did not expand on what the FCA might consider artificial, but artificiality in one of its strongest forms – sham – was alleged by the Claimants in the case, an allegation that I rejected. It seemed to me, however, that Mr Griffiths was concerned that the FCA might not simply accept a corporate structure, even one that was not a sham, and it was in turn very much a legitimate interest of LCL that it be able to show the FCA there were no issues with the Loan. That is consistent with the need for an inspection to confirm that the Housseins had vacated 71 Hamilton Road before drawdown. Despite the fact that the loan was to a corporate entity Mr Griffiths considered that any lender who relied solely on the FCA declaration would have been “foolish”.

In the circumstances it seems to me that, given the “horrific” consequences for LCL in making a regulated loan, it was entitled to take a firm approach to deterring any breach of the non-residence provisions of the Facility Letter. Again, I accept Mr Griffiths’ evidence that it did so in a way that was not market standard. Presumably other lenders in the pool considered by Mr Griffiths and Mr Kyriacou were unregulated but felt comfortable addressing this risk with a lower default rate. It was again at the upper extremity of commercially acceptable rates in respect of this interest. It was, however, within that range. A single defaulted loan would not bring down LCL’s business; a single regulated loan could. LCL was reasonably entitled to be somewhat more conservative, in protecting its interests, than other lenders. In those circumstances, it seems to me that the Default Rate in respect of the Non-residence Interest does not approach the level of being extortionate.

The Security Interest is obviously highly significant in principle. It is the lender’s primary protection if there is default in respect of the Repayment Interest. At paragraph 3.74 of his Report Mr Griffiths made reference to the significance of LTV in setting the Standard Interest: “in my opinion, it is a reasonable assumption that the lower the LTV, the lower the interest rate should be, in order to reflect risk to the lender.” As I have noted above, he made a similar point in his cross-examination: he would have no issue with higher default rates if the LTV was over 80%.

Of course, for LTV to mean anything, the value element of the calculation must be preserved. Each of the primary obligations that were underpinned by the Security Interest involved the security being at least materially prejudiced and at worst destroyed, materially increasing the risk to LCL. The protection of its security was plainly an important aspect of the Loan and, on Mr Griffiths’ evidence, a significant risk mitigant. If it was threatened or compromised, LCL had a strong interest in ensuring that steps were taken quickly to remedy the position or repay the Loan. Again, the Default Rate obviously went beyond what was normal in the market in respect of this interest. Given the importance Mr Griffiths attached to it, however, I accept that it was an important interest and it merited significant protection. Again, it sits at the upper extremity of what was commercially acceptable, but it is within that bracket.

The historic aspect of the Representation Interest is, as I have noted, the basis on which the loan is advanced in the first place. It is open to a lender to specify what is important to it in making its decision to lend at the rate that it does. It was never suggested that these were not significant factors at the inception of the Loan. I entirely accept that a Lender has a very strong interest in understanding the basis on which it is lending, since that is how it assesses risk. Focussing the borrower’s mind on the accuracy of its representations is a fundamental aspect of protecting that interest. The Default Rate was a market outlier, but it seems to me still reasonable given that this element of the interest goes to the heart of the decision to lend.

As I have also noted, the position shifts somewhat for the deemed repetition of the representations and warranties, in that an event after drawdown cannot undermine the basis for it. It is one thing to say that if one had known the truth one would have acted differently; it is another to say that when circumstances change one would like to get out. The latter is much more akin to the Security Interest and the Credit Risk Interest. For reasons already addressed, the Security Interest is in my view a strong one: maintaining the security is what buttresses the Repayment Interest. That leaves the Credit Risk Interest.

It was the Credit Risk Interest that most concerned me in my First Judgment, although I recognise that I should have been much clearer about why.

I have addressed the theoretical aspects, as I understand them, of credit risk above. Essentially, at least in this context credit risk is an attempt to predict the future. Typically, the future uncertainty is the likelihood that the borrower will default within the term of the loan. As the Court of Appeal has noted, as Bryan J and Colman J noted, as the experts in this case noted and as, in any event, is well known, if the credit risk goes up, the interest rate typically goes up to reflect that. Put simply, there is no issue with having a default rate as such; it is the size of the increase that matters. Again, that is entirely in line with Lordsvale, Cargill and Ahuja

My concern had two distinct but related aspects. The first concerns the reference class problem that I have addressed at paragraphs [230]-[231] of this judgment: why would one reasonably expect the different events of default within the Credit Risk Interest group to have the same impact on the probability of CEK defaulting on the Loan? Put another way, why are (to use the example of paragraph [230]) Party B and Party C in the same reference class? That is important because if the probability of future default is lower for some of those present defaults, the interest in enforcing those provisions is on its face weaker.

The second aspect went to the evidence I had about risk magnitude. This was the issue of the £20,000 unappealable judgment. There was an obvious parallel to be drawn between that event of default in the Facility Letter and a County Court Judgment rendered against the Housseins before the Facility Letter was entered into. Mr Theophanous explained in his evidence that in setting the Standard Rate this was a risk factor that he considered. The judgment was in the amount of £15,442.81, and I note that during his cross-examination Mr Theophanous confirmed this was the figure he considered. I equally note, however, that an enforcement order in respect of that judgment was made in the sum of £20,404.90 on 26 February 2019. Payment was made in respect of that judgment a little under three weeks later. Mr Theophanous further explained that the County Court Judgment, combined with other factors, caused him to increase the Standard Rate on the Loan by 0.3% per month. Mr Griffiths thought that even this was too much, but assume for current purposes it was appropriate.

Had that judgment post-dated the Facility Letter it would not necessarily have resulted in a payment default on the Loan; it would have remained a risk factor that might or might not mature into the cause of such a payment default. CEK’s credit risk would be somewhat further impaired in that the Claimants would now have something of a record of such judgments being rendered against them – one may be bad luck but two starts to look like carelessness – but since this remained a risk rather than a cause of payment default, in principle one might expect an impact on the interest rate of a similar order of magnitude – 0.3-0.5% per month. That is not how the Facility Letter works. The Default Rate that applies when a £20,000 judgment is rendered and left unpaid for a short period during the term of the Loan is very significantly more than the increase to the Standard Rate reflecting an almost identical judgment rendered before the date of the Facility Letter. I accept Mr Wheeler’s point that the ratio will vary depending on how many compounding periods there are, but even at the outset the difference is a factor of ten. That was particularly striking where, as here, the loan was heavily secured with an LTV below 55%. That had been a significant factor for Mr Griffiths, and at the time it likewise seemed significant to me.

No explanation for this difference in treatment was offered by LCL. For the avoidance of any doubt or confusion, that is not to say that had Mr Theophanous and his colleagues at LCL given their reasons for what they did I would simply have accepted them, nor would I simply accept them now. As I have noted of Mr Theophanous before, he is an experienced and sophisticated businessman who is robust but fair in his dealings with LCL’s clients. I have not heard from others at LCL involved in setting the Default Rate, but I have no reason to think they are any different. I am sure that, in their minds, the discrepancy was justified. That is not the point.

The point, it seemed to me, was that a key risk identified in connection with historic payment defaults was risk of future payment defaults under the Loan. Historic payment defaults, most notably the County Court Judgment, were addressed by a relatively small rise in the Standard Rate; by contrast, an almost identical default after the Loan had been entered into was addressed by a much greater increase. Nor could this be dismissed on the basis that the historic default was years in the past. Had that been the case then, objectively, I can see it would limit the predictive force of the past event. Here, however, the County Court Judgment was only around a year in the past.

Again, this was against a backdrop of the risk being, at least in part, further addressed by personal guarantees from Mr and Mrs Houssein and, critically, charges over 71 Hamilton Road and the Downhills Way Properties. Where default on the Loan was already well guarded against, where historic actual default merited a 0.3% change in rate, where the experts had opined that this magnitude of increase to address credit risk reflecting historic default was reasonably standard in the market (which seems to me the necessary implication of the answers in the Joint Statement of Experts on issue 1) I considered that a further 3% increase linked to the risk of payment default was, objectively assessed, extortionate.

In that I was wrong. In particular, while I still consider that I identified the right factors in assessing credit risk purely on the question of likely default, following this hearing I now recognise the link that a reasonable lender in LCL’s position would make between any of the defaults that relate to the Credit Risk Interest and the impact on a potential refinancing.

Both experts agreed that by far the preferred exit from the Loan was a refinancing and that enforcement of the security was a last resort. Mr Griffiths’ evidence was, I feel, captured by an answer he gave in respect of the Bridge Loan:

As I noted earlier in this judgment, in Cargill Bryan J expressed the view that where the loan is secured, default is simply a path to the security. It seems that is not the case in this market.

In his expert report Mr Griffiths explained that in assessing the viability of the exit strategy the lender would have two issues at the forefront of its thinking: the LTV (basically, was the security robust) and the interest cover (could the rental income support the interest payments, since the replacement lender would only be prepared to fund a refinance if the interest on its loan could be paid). As he explained at paragraph 3.57, both were critical:

LTV is straightforward to calculate: one values the security, one knows the value of the loan and the LTV is the latter divided by the former and expressed as a percentage.

Interest cover is a little more involved and requires certain assumptions as to what the refinancing lender would want to achieve. A document that I understand was in LCL’s disclosure showed that LCL had assumed that any lender refinancing the Loan would charge interest at 5.5% and would want rental income to be 145% of that amount to be comfortable that the interest could be paid. Mr Griffiths specifically commented, I think it is fair to say somewhat critically, that LCL’s assumed interest cover ratio of 145% and interest rate of 5.5% was “a very conservative assumption and, overly-cautious in taking a ‘worst-case’ approach”. Despite that, he went on to note that 5.5% was “common because even where the actual contractual rate is lower, there is an allowance for rates to rise.” He also referred to an article from July 2020 in Business Moneyfacts that gave 17 pages of buy to let mortgage products with interest cover requirements between 125% and 160%. Unfortunately, that does not seem to have been exhibited to his report so one cannot determine how many lenders were at each level. However, simply taking what Mr Griffiths said, which I do not doubt is true, 125% would represent a best-case scenario, 160% a worst-case and 145% would be roughly halfway.

Mr Griffiths then calculated the maximum loan available showing both the amount achievable if 71 Hamilton Road was part of the rental portfolio and the position if only the Downhills Way Properties were rented. He very helpfully included a sensitivity analysis to show different interest cover ratios of 125%, 130%, 135% and 140%.

Somewhat curiously he did not address the position for an interest cover ratio of 145%, the figure used by LCL, nor did he address higher interest cover ratios even though they were referred to in his Business Moneyfacts article, but he was not challenged on that.

There is, I believe, an error in his table for the scenario premised on the Downhills Way Properties. As I have set out, the calculation for Interest Cost is described as “£145,000/interest cover ratio”. The figure of £145,000 is his rental figure for all the properties; the equivalent figure for the Downhills Way Properties is £111,400. I note this purely by way of completeness; the cells in the table seem, at least to me, to reflect the correct calculation.

To obtain the Maximum Loan (i.e. the maximum amount a refinancing lender would lend) he took the Interest Cost and multiplied it by 18.18, on the basis that 5.5% (which was the assumed interest rate) equates to a multiplier of that figure. Put simply, if you multiply 5.5 by 18.18, you arrive at 100%. Technically the .18 recurs, but Mr Griffiths had rounded and the difference is minor.

Mr Griffiths then calculated the amount required for refinancing. He took the gross amount of the Loan – £1.881 million – and deducted the 12% interest element and 2% of the fee to reflect the fact that the properties were generating a rental income. I understand the rationale for such an approach, and in any event he was again not challenged on it. That produced a net refinancing figure of £1,618,380.

From that he concluded that even based just on the Downhills Way Properties refinancing in the amount required by the Claimants was “achievable”. To be clear, I think he was right to assume that only the Downhills Way Properties were income generating. LCL had been told that 71 Hamilton Road was still undergoing renovation work following which the Housseins were to move back in, and a lender in LCL’s position understanding that would not allow for any income from such a property. Even if that is the wrong assumption, and LCL’s corporate knowledge, through Mr Stylianides, that the Housseins remained in residence throughout is the relevant understanding, the outcome is the same. Only the Downhills Way Properties were available for the purposes of interest cover. As will be seen from the table, so far as it related to those properties Mr Griffiths’ conclusion could only be on the basis of a 125% interest cover. That was the best-case scenario according to the figures from Business Moneyfacts, but obviously Mr Griffiths thought that was appropriate. It seems from his report that he drew comfort from the LTV based on what he knew about the Downhills Way Properties and 71 Hamilton Road at the time of the trial.

Matters, in my view, changed at this hearing. First, the effect of the Housseins remaining in 71 Hamilton Road on the LTV became clearer, certainly to me. It was put to Mr Theophanous, in the context of the settlement negotiations, that he was unreasonable to refuse an offer where outstanding sums were secured by a charge over 71 Hamilton Road, the family home. Mr Theophanous did not accept this:

It was then put to him that Gunnercooke had later suggested that security over 71 Hamilton Road was sufficient in respect of costs and accrued interest. Mr Theophanous explained that in fact the interest was to be paid into HCA’s client account, providing additional security.

I accept Mr Theophanous’ evidence that 71 Hamilton Road was worth less with the Housseins in than it was with them out. That inevitably impacted the LTV. That enforcement would not be straightforward chimes with what Mr Griffiths had said in the evidence I have quoted above, and again in my view would impact the LTV. I also accept that if the property was not let it would not be producing income but I attach no real weight to that point. As I have noted, Mr Griffiths in his calculations allowed for such a scenario and still concluded that the interest cover was achieved, albeit the position was quite marginal.

I was also struck by the evidence of Jack Liondaris at this hearing. As I have noted much earlier in this judgment, he has been involved in this matter at different stages, all after the initial alleged breach of the non-residence provisions of the Facility Letter, assisting the Claimants in attempting to secure the finance to repay the Loan. In his witness statement he explained how he selected Kent Reliance as a potential lender for the refinancing. Of particular relevance for these purposes was his view that: (i) Kent Reliance was more flexible than mainstream lenders; (ii) it was more focussed on the security properties than the borrower’s credit record; and (iii) applications to Kent Reliance had a high approval rate.

Despite all this, in 2023 Kent Reliance declined an application for refinancing of 205 Downhills Way because the property was being used as a house in multiple occupation (HMO) and used for “assisted living tenants”. Precisely when that happened is unclear; Jack Liondaris suggested it was July but the document to which he refers is dated 19 September 2023. That detail makes little difference. It is the fact of and reasons for the refusal that seem, to me, significant.

Very obviously, if a lender who is known to be flexible and to whom applications had a high approval rate would not lend, that would inevitably call into question the exit strategy because it seems likely that other, less flexible lenders would take the same view. To be clear, I recognise that earlier applications on 205 Downhills Way to Kent Reliance had been approved at the level sought. The point is that LCL had no control over how (in the sense of single unit or HMO) the Claimants let the Downhills Way Properties or to whom. Yet a shift in these factors at any time during the term of the Loan could prejudice the refinancing.

The analysis of the second application in July 2023, in respect of 207 Downhills Way, is somewhat more nuanced. Mrs Houssein applied for a loan of £425,000. Kent Reliance were only prepared to offer £326,755 on the basis that the monthly rental income of £2,400 was insufficient to service a loan of any greater amount. I note immediately that Kent Reliance, known for its flexibility and high approval rate, by July 2023 was using a minimum interest cover ratio of 140%. That obviously does not tell me what the correct figure was three years earlier, but coupled with Mr Griffiths’ evidence regarding the range of rates it suggests that he was optimistic in using 125%.

The Bank of England base rate, of which I believe I can take Judicial notice, had risen from 0.1% in July 2021 to 5% in July 2023, and was still on an upward trajectory (it increased to 5.25% in August 2023, where it remained for some time). Looking at the European Standardised Information Sheets from Kent Reliance one sees something similar, albeit to a lesser order of magnitude. The July 2021 offer from Kent Reliance was based on a fixed period loan, whereas the July 2023 offer was not, making the calculation of average interest rates in the latter case subject to assumptions about repayment for which I have no evidence. However, the annual percentage rate of charge (the APRC), which is principally driven by the interest rate, had risen from 5.5% to 7.9%. A move of around 2.4% in interest rates had reduced the available loan by approaching a quarter.

That was against a backdrop of a significant increase in rents. The application for a mortgage in respect of 207 Downhills Way from February 2021 gave the rental income as £1,950 per month. Jack Liondaris was uncertain whether that was accurate and Ms Huseyin was unable to assist with the point because she was not responsible for managing the properties. The figure given in the Alexander Lawson valuation carried out in July 2020 for the purposes of the Loan equated to £1,600 per month, and I have no reason to doubt that was reliable. Despite, then, a 50% increase in rents over the three-year period the shift in the APRC would have rendered a refinancing of the Loan impossible.

The final point from the evidence is the obvious one, that credit default can affect interest rates. The point is addressed at some length above. There was a question in about how much difference it would make, and certainly Mr Griffiths appeared to be of the view that the 0.3% per month applied by LCL to reflect historic defaults was too high by reference to other rates in the market. As I have noted, however, he accepted in his cross-examination the general principle that rates reflect, in part, credit risk (in its predictive sense). A reasonable lender would, I think, have taken the same view.

Here, even quite a small change in the assumed rate could have had a significant effect. If I have understood Mr Griffiths’ approach to the multiplier correctly, if the interest rate moved from 5.5% to 5.6% the multiplier would move to 17.86. Even on Mr Griffiths’ best case scenario of a 125% cover ratio, assuming only the Investment Properties as security, the maximum loan would be £1,591,428, insufficient to refinance on Mr Griffiths’ figures. At a 130% cover ratio the maximum loan for refinancing would be £1,530,214, a shortfall of almost £90,000.

The position can be viewed from another perspective. Mr Griffiths calculated the refinance amount as being £1,618,380, which as I have noted was not challenged and which I accept. Using Mr Griffiths’ model, if the interest cover ratio is 140% the multiplier needed to get there is 20.34 (which is the £1,618,380 refinancing divided by the £79,571 interest cost). That produces an interest rate of around 4.9%: if the assumed interest rate rose above that figure, a lender assuming an interest cover ratio of 140% would conclude that refinancing would not happen. That is obviously an assumed rate well below the level Mr Griffiths thought was used in the market at the time. Such a rate therefore already had much less of a buffer against shocks, including credit risk shocks. Yet using Mr Griffiths’ model, that is the rate that would need to be used on Kent Reliance’s interest cover ratio.

In light of Jack Liondaris’ evidence and the apparent use of an interest cover ratio by Kent Reliance of 140%, I do not consider that a lender in LCL’s position could properly be criticised for assuming that any incoming lender on the refinance would operate on the basis of a 145% interest cover ratio. That was around the mid-point of the spread from Mr Griffiths’ figures in any event. Yet at anything approaching that level, a lender in LCL’s position would be entitled to conclude that even the smallest of moves in the interest rate charged to the Claimants on refinance would destroy any prospect of refinancing and leave them faced with enforcing against the security, the outcome that Mr Griffiths considered was “painful and uncertain” and “to be avoided at all costs”.

That, in my view, explains why the Credit Risk Interest would be so critical to a lender in LCL’s position. To return to my now frequently used example, it is not simply that a £20,000 judgment debt would mean the Claimants’ total debt would increase by that amount (which is only a little more than 1% of the Loan). If the Claimants further defaulted or faced further credit issues in respect of other obligations there was a material risk that the assumed interest rate they would face on refinance would increase, just as the Standard Rate they had to pay to LCL had increased to reflect historic credit issues. That, in turn, would affect the interest cover ratio and the consequence could be anything from a reduction in the loan amount (which in itself could be terminal for a refinancing) to some or all of the Investment Properties not being capable of supporting lending at all (which obviously would be terminal).

Nor is that analysis limited to judgment debts. This comes back to the question of the correct reference class, and in particular to Professor Oberdiek’s point that in assessing that question, and so in turn in assessing probability and risk, one must consider causation. A refinancing of this portfolio was far from straightforward. Applying realistic assumptions, a reasonable lender in LCL’s position in July 2020 would, in my view, properly conclude that there was no or almost no margin for error. Even on the best case of a 125% interest cover ratio used by Mr Griffiths the refinancing squeaked home. Any of the events of default that I have referred to in the Credit Risk Interest could reasonably be expected, in my view, to move the interest rate sufficiently to cause the refinancing to collapse. Some, such as unpaid judgment debts, might be more dramatic in their effect than others, but they would all cause the same outcome – realisation of the security. There was nothing available to LCL to suggest that the Housseins had alternative means of bridging the gap – beyond a certain point, a miss was as good as a mile. All the events of default listed could have the same effect; it was right to treat them in the same way.

Nor do I think such a lender would place so much faith in the apparently robust LTV of 55% as Mr Griffiths did. I say this for two reasons. First, as part of the process of applying for the Loan a valuation of the various properties carried out in July 2020 by Alexander Lawson Chartered Surveyors. Those valuations recorded that 199 Downhills Way was not let; the other properties were let on assured shorthold tenancies, albeit in most cases to sharers. They valued the Downhills Way Properties on different bases, but the basis relied on for the 54% LTV figure had them valued at between £510,000 and £525,000. On the same basis, 71 Hamilton Road was valued at £875,000.

However, in reaching those figures each of the valuations recognised the uncertainty caused by the Covid 19 pandemic and the process of the United Kingdom withdrawing from the European Union:

Lenders in LCL’s position were therefore already being told to be cautious about LTV. It is not clear to me whether Mr Griffiths saw this part of the valuations. He does make reference to the valuations in his Report, but only briefly and what he says could have been derived from the Particulars of Claim, where certain aspects of the valuations were summarised. They do not appear in his list of documents seen. In many ways it does not matter; these were the valuations prepared for LCL, and a reasonable lender is entitled to rely on what is said in them.

One adds to that what Jack Liondaris explained about the impact a change in tenants could have; in a realistic worst case one or more of the Downhills Way Properties would fall out of the LTV calculation altogether – the loan would remain constant but the value would fall. While, as this case demonstrates, the outcome can be binary – a property is simply excluded altogether – there are presumably cases where the situation is less stark and the lender will lend but adopts a more conservative valuation of the property. It would be wrong to speculate as to precisely what the impact might be. Similarly, while I accept Mr Theophanous’ evidence that the value of 71 Hamilton Road with the Housseins resident would be lower, I do not know how much lower. What is clear is that the LTV could be higher than the 54% that was presented to LCL, even leaving aside the uncertain market conditions at the time.

This, it seems to me, is highly significant in considering the Credit Risk Interest. Makdessi requires me to ask what an objective party would have thought at the time the agreement was entered into. At that time LCL knew that the preferred exit was refinance, had a reasonably standard interest cover model for assessing the prospects of refinance, knew that only the Investment Properties would produce an income and knew that as a general rule further credit default would probably affect the rate at which the Housseins could borrow to refinance.

Applying Mr Griffiths’ model to what LCL knew or is deemed to have known at the time, it would have been obvious that the preferred exit route was at best viable, but no more than that, and that its viability would quickly be called into question if the interest rate sought by the refinancing lender changed for any reason. One reason why they might move was any further defaults of the borrower, whether on the Loan or any other lending. Even a claim or a threat of a claim could have such an impact.

It would, objectively assessed, therefore have been very much in the interests of any lender in LCL’s position to see that the Housseins did not so default. Using the language of Makdessi at paragraph [99]: “there [was] a legitimate interest in influencing the conduct of [CEK] which is not satisfied by the mere right to recover damages for breach of contract.” The Credit Risk Interest was not tied simply to the fact that the Claimants had defaulted on a debt; had that been the case it would have been hard to see (indeed, I did find it hard to see) why a default a few days before the Loan meant an increase of 0.3% to the interest, whereas an identical default a few days later would have meant an increase of 3%. That would seem, and did seem to me, extortionate. Far more importantly it was tied to the need for refinance in order for the hypothetical lender in LCL’s position to be repaid, and so in turn the Credit Risk Interest is tied to the sensitivity of that refinancing to any move in interest rates. That was the point that was not clear to me based on the evidence at trial.

As I have noted, Mr Griffiths plainly thought that 4% was, at best, at the limit of commercially acceptable rates. As I have also noted, however, that is not the test. Moreover, and in any event, in light of the evidence I now have I consider that Mr Griffiths’ use of a 125% interest cover ratio was too optimistic. A lender in LCL’s position, working with Mr Griffiths’ model, would have understood the critical importance of the refinancing interest rate remaining at or below the assumed rate of 5.5%; even a small change could derail any refinancing. It would have therefore attached, and rightly attached, very significant weight to anything that might affect that refinancing rate. The weight to be attached to it would only be increased where, as here, the LTV on the portfolio was already compromised by the Housseins’ residence of 71 Hamilton Road and could be further compromised by such things as a change in the Downhills Way Properties letting arrangements to HMOs or even a change in the nature of the tenants to assisted tenants.

Given those factors, it seems to me that it was not extortionate for LCL to attach an above market default rate to the Credit Risk Interest. This was a marginal prospect; LCL had every reason to want to ensure that it did not deteriorate further. Again, therefore, I do not consider the Default Rate to be a penalty.

Unlike Cargill, Lordsvale or Ahuja, the Default Rate in this a case applies to different primary obligations and different legitimate interests, yet it treats them all in the same way. I accept that the starting point is therefore that this gives rise to a presumption, but no more than that, of penalty. In some respects that presumption is easily rebutted because LCL’s interests in enforcing their primary obligations obviously significant ones. Repayment is, from the lender’s perspective, what loans are all about; secured lending is cheaper than unsecured lending because of the additional risk protection it offers.

The exception was the Credit Risk Interest, which seemed to me at trial to deal with almost identical events in radically different ways depending on whether they occurred before or after the Facility Letter was entered into. I could see no explanation for that, and none was offered by LCL, whether in its evidence or its submissions. In the course of this hearing I came to appreciate that Mr Griffiths, through no fault of his, had based his conclusions on the refinancing on too rosy a picture of the Claimants’ portfolio. The refinancing was much more finely balanced than he had thought, and even a slight change in the assumptions could destroy its prospects of success. In particular, if the Claimants’ credit risk increased to the point that the assumed interest rate shifted by as little as 0.1%, significantly less than the change Mr Theophanous had applied to reflect historic defaults, LCL could find itself trying to realise the security, a security that was itself more volatile than I had understood.

In those circumstances, LCL’s interests in keeping so finely balanced a structure from keeling over was, in fact, a very strong one. I have noted repeatedly of Mr Theophanous that he is robust but fair in his dealings with LCL’s borrowers. The Default Rate was also robust, more so than was the case for other lenders, but it was not more than LCL was entitled by law to charge. It was not a penalty.