Early repayment fees, extension fees and double interest provisions in loan agreement not penalties
27 February 2018
Early repayment fees, extension fees and double interest provisions in agreements relating to a loan did not fall foul of the English law rule against penalties. The case shows how the principles set out by the Supreme Court’s ruling in Makdessi1 apply in the context of a loan: (1) Mark Alan Holyoake (2) Hotblack Holdings Ltd v Nicholas Anthony Christopher Candy & 5 ors  EWHC 3397 (Ch), 21 December 2017
Mark Holyoake (Mr Holyoake) wanted to buy a property on the edge of Belgravia. He raised the purchase price from a number of sources, including an unsecured personal loan of GBP12 million from CPC Group Ltd (CPC). After CPC alleged that Mr Holyoake was in default, he entered into a series of supplemental agreements with CPC which rescheduled the loan in return for Mr Holyoake paying extension fees (the extension agreements).
The property was eventually sold by Mr Holyoake and the loan and extension fees were paid to CPC. Mr Holyoake brought a claim for repayment of the sums paid to CPC on a number of legal grounds. This article focuses on his assertion that certain clauses of the loan agreement and extension agreements were penalties.
Mr Holyoake tried to claim three types of clauses were penal, but did not succeed with any of the claims.
Strike one: early repayment clause
A clause in the loan agreement provided Mr Holyoake with the option to repay the loan early provided that all interest which would have accrued over the term of the loan was also repaid. The judge did not consider this a penalty clause. The clause was not expressed to operate on breach; it governed what sums were due upon early repayment. In Makdessi the Supreme Court ruled that the doctrine of penalties applies only to contractual provisions operating on a breach of contract.
The effect of the clause was to ensure that CPC received the interest which would have accrued over the loan term, whether the loan was paid early or not. The clause, therefore, was part of Mr Holyoake’s primary obligations and did not fall within the scope of the penalty clause rule.
Although it was not necessary to settle the issue, the judge considered an escrow deed entered into by Mr Holyoake. The deed provided that in the event that Mr Holyoake did not (among other things) complete repayments under the loan, he would be released from all liabilities under the loan agreement, and the full loan amount, including interest, would be payable as a fresh obligation on the following business day. The deed itself did not oblige Mr Holyoake to complete loan repayments. The effect of the deed was that Mr Holyoake agreed to pay the loan and interest not as a penalty for breach of contract but as a consequence of neither refinancing nor completing the loan. The obligation was therefore not within the penalty rule. The judge thought that this “may be an example of clever drafting”.
Strike two: loan extension fees
Under the extension agreements, which provided Mr Holyoake more time to pay off the loan, extension fee clauses came in two forms:
1. extension fees which, if paid in line with an agreed timetable, would reduce the amount of debt payable; and
2. extension fees which were payable in any event, with no provision to reduce the amount of debt payable.
Again, the judge did not consider either type of extension fees clause to fall within the rule against penalties. The fees were “expressly made payable in return for the extension of time”, and where sums are payable under a contract the parties are free to decide what these sums are payable for. Here, the extension fees were, “in a real and substantive” sense, payments in return for consideration rather than payments due as a result of a breach of obligation.
Strike three: double interest clauses
The extension agreements required payment of further interest on sums which already included previously accrued interest (‘double interest’ charges). The judge addressed two scenarios where ‘double interest’ was charged:
- Interest which would have been due “even if Mr Holyoake had kept scrupulously to the timetable for repayment”. In this scenario, the rule against penalties could not be engaged as the relevant provision did not operate on breach.
- Interest which would not have been charged had Mr Holyoake adhered to the payment schedule. The judge held that “failure to keep to the repayment schedule” was the trigger for the interest, and this was “undoubtedly a breach of the agreement”. The clause therefore engaged the penalty rule.
In the second scenario, the question was whether the clause protected a legitimate business interest, and whether the protection was nevertheless “extravagant or exorbitant or unconscionable”. The judge again decided against Mr Holyoake on this point because, clauses providing for the entire balance of debt to become payable on default are standard provisions and charging further interest on top of this sum is also standard practice.
As the judge noted, there is a sound commercial basis for this: “once the debtor is in default, the creditor is not only being kept out of his money but running an enhanced credit risk”.
This case demonstrates that carefully framed obligations can make a difference in how the court applies the rule against penalty clauses. It appears that obligations applicable not upon breach of contract but, instead, on a failure of a condition may not be caught by the rule against penalty clauses. This was also reflected in the Court of Appeal decision of Edgeworth Capital2. In this case the court held that a cross-default provision did not fall foul of the rule against penalties as the fee payable had nothing to do with damages for breach of contract; it was payable on the happening of a specified event. This case, as well as the Edgeworth Capital case, also perhaps displays a reluctance by the court to use the penalty rule to frustrate standard loan provisions.
1 The Angelic Star  1 Ll Rep 122.
2 Edgeworth Capital (Luxembourg) SARL & anr v Ramblas Investments BV  EWCA Civ 412.
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