Borrowers who take out loans at high rates of interest with their eyes wide open may have only themselves to blame. As a High Court case showed, however, such loans may be vulnerable to arguments that they amount to a penalty or are the product of an unfair relationship between a commercial lender and a less sophisticated or vulnerable borrower.

A property owner obtained a six-month bridging loan secured by second mortgages over three buy-to-let flats. The £355,000 loan was subject to interest at a rate of 2.5 per cent per month, an annual rate of 30 per cent. Interest of £37,500 was rolled up in the loan, together with substantial facility, brokerage and other fees.

In default of repayment of the entirety of the loan at the end of the six-month term, the rate of interest charged on any outstanding sum increased to 12 per cent per month, compounded (the default interest rate). That equated to an annual rate of 289.6 per cent.

After the borrower defaulted, the lender sought possession of the flats and a money judgment. By the time the case was heard, the outstanding contract debt had, with interest, grown to a sum of about £13.3 million. However, the lender voluntarily agreed to cap its monetary claim at £850,000.

The borrower contended that the default interest rate amounted to a penalty and was thus void. He further argued that his debt should be reduced or discharged on the basis that his relationship with the lender was unfair within the meaning of the Consumer Credit Act 1974. He was in poor health and asserted that he had no opportunity to read through the loan documents before signing them whilst sitting in his wheelchair in the street.

In upholding the lender’s claim, however, a judge found that the borrower was fully cognisant of what he was signing and had entered into the loan agreement voluntarily and under no form of pressure. Whilst £13.3 million might seem an astonishing sum of money to someone who did not understand the situation, it represented the contractual rate of interest to which he had agreed as a borrower for business purposes. The lender was, in any event, only seeking a fraction of that sum.

Allowing the borrower’s appeal against that outcome, the Court noted that he had difficulty presenting his case due to his health problems. It was for the lender to show that the relationship was a fair one and the judge had erred in law in finding that, in the absence of expert evidence, the borrower’s challenge to the default interest rate could not succeed. The arithmetical consequence of that interest rate itself constituted evidence in the case. The Court directed a retrial of the lender’s claim before a different judge.