Banking and finance legal update: Q4 2025

In this quarterly update we:

• review CLLS and LMA guidance on the validity of documents with mixed execution and the “face value requirement” for deeds;
• consider recent Court of Appeal decisions on default interest as penalty clauses, mortgagee control of sales and waiver by election;
• outline key reforms under the Economic Crime and Corporate Transparency Act 2023, including identity verification and changes to statutory registers;
• summarise updates to LMA guidance on the register of overseas entities regime and transition loans; and
• highlight key finance law developments expected in 2026, including further Companies House reforms and building safety changes.

Default interest provisions as penalty clauses

The enforceability of default interest clauses has been considered in the courts once again in the case of Houssein v London Credit Ltd [2025] EWHC 2749 (Ch). Default interest has become a renewed focus for both lenders and borrowers in recent years following the Supreme Court’s decision in Cavendish Square Holding BV v Talal El Makdessi (Makdessi), which redefined the “penalty rule” in English contract law. The Makdessi test shifted the focus from whether a clause was a genuine pre-estimate of loss to whether it protected a legitimate commercial interest, and whether any detriment imposed was out of all proportion to that interest.

The Houssein case involved an unregulated lender (LCL) and borrowers who refinanced their property investment loan through a company structure to avoid regulatory restrictions. The loan agreement included a non-residency clause and two interest rates: a standard rate (1% per month) and a default rate (4% compounded monthly).

When the borrowers breached the non-residency clause, LCL sought to enforce the default rate. The High Court initially found the default rate to be a penalty and unenforceable, reasoning that the lender’s risk was mitigated by strong security and that applying the same default rate to all breaches was unjustified.

On appeal, the Court of Appeal held that the High Court had misapplied the Makdessi test. The Court clarified that lenders have a legitimate interest in enforcing repayment obligations and that charging a higher rate after default is commercially justified due to increased credit risk. The proportionality of the default rate – whether it was extortionate or unconscionable – was not properly considered by the High Court.

The case was sent back to the High Court, which ultimately found that the default rate was not a penalty. The judge grouped the events of default and assessed the lender’s legitimate interest in each category, including repayment, representations and warranties, security, non-residence, and credit risk. The Court accepted that the lender’s interests in each category of default were legitimate and that the default rate, while at the upper end of the market, was not extortionate, especially given the borrowers’ experience and professional advice.

The judgment emphasised that where a loan agreement applies the default rate to all events of default, default interest provisions must be carefully drafted to ensure each type of default relates to a legitimate interest. The presence of professional advice and negotiation was also a factor supporting enforceability.

What are the key takeaway points?

• Lenders have a valid interest in charging higher rates after a default relating to credit risk because a borrower becomes a greater credit risk and this can impact on the ability to repay the loan via a refinancing.
• While a significant increase in interest may be acceptable, it must not be out of all proportion to the lender’s risk. Evidence of market norms as well as expert testimony will help to justify the rate.
• The loan agreement applied the default rate to all events of default, not just non-payment. The Court stressed that each default type must relate to a legitimate interest; otherwise, the entire clause could fail. Lenders should take care to consider each default type to ensure that it protects their legitimate interests.
• Documenting professional advice and the rationale for default rates strengthens enforceability.

Find out more

Read our full article on default interest provisions as penalty clauses

Houssein v London Credit Ltd [2025] EWHC 2749 (Ch) (23 October 2025)

LMA updates guidance on Register of Overseas Entities regime

The Loan Market Association (LMA) has released an updated version of its guidance note on the register of overseas entities (ROE) regime, originally introduced under the Economic Crime (Transparency and Enforcement) Act 2022. This update reflects changes brought in by the Economic Crime and Corporate Transparency Act 2023 (ECCTA 2023).

The note now covers the new requirement under ECCTA 2023 for registered overseas entities to provide information to Companies House upon request (section 1092A of the Companies Act 2006, inserted by section 83 of ECCTA 2023). Failure to meet these ongoing obligations means the entity will no longer be treated as a registered overseas entity until the breach is remedied. The LMA has revised its suggested conditions precedent (CPs) and undertakings to reflect this additional compliance obligation.

As well as providing information upon request, overseas entities are also obliged to update the information on the ROE annually. The note has been updated to flag that where an overseas entity acquires a UK property, the overseas entity must be in compliance with its ROE obligations at the time the application is made to HMLR to register the overseas entity as the proprietor. To allow time for the application to be submitted, the note flags that lenders should ensure that the annual update is not due for a period of at least two months after the date of the relevant security agreement.

The updated guidance note is available to LMA members. Importantly, the LMA has not incorporated these provisions into its standard form templates; they remain available only as a rider.

What are the key takeaway points?

• Lenders should note that non-compliance with ROE information requirements can result in the entity losing its registered status, which may impact enforceability and security.
• Lenders may wish to review and update CPs and undertakings in facility documentation to reflect the new Companies House information requirement and to ensure that where a property is being acquired as part of the transaction, the annual update is not due for a period of at least two months after completion.

Find out more

LMA Documentation Hub (LMA login required)

No waiver by election without knowledge of express right to terminate

The Court of Appeal has held that a party which has an express right to terminate a contract in certain circumstances will not be held to have elected to affirm the contract unless it knows that it has such a right.

URE Energy Limited (URE), a start-up energy supplier, entered into a four-year electricity supply contract with Genesis Housing Association (Genesis), with the expectation of negotiating a longer-term deal. The contract included a clause allowing URE to terminate if Genesis amalgamated with another entity without URE’s prior approval. In 2018, Genesis merged with Notting Hill Housing Trust to form Notting Hill Genesis (NHG), but URE did not object or seek to terminate at the time, continuing to perform under the contract.

When the relationship soured and NHG withdrew from negotiations for a long-term contract, URE sought to terminate the contract and claim a substantial termination payment, relying on the amalgamation clause. NHG argued that URE had affirmed the contract by continuing performance after the amalgamation, thereby waiving its right to terminate.

The central question was whether URE had lost its right to terminate by “waiver by election” – that is, by electing to affirm the contract through its conduct. The case turned on whether URE needed to know not only the facts giving rise to the right to terminate (the amalgamation) but also that it actually had such a right under the contract.

The Court of Appeal, upholding the High Court, confirmed that a party does not lose a contractual right to terminate by election unless it knows both the facts and the existence of the right itself. This follows the principle established in Peyman v Lanjani [1985] Ch 457, which the Court found to be of general application, including to express contractual rights.

The Court rejected NHG’s argument that parties are deemed to know all express terms of their contracts as a matter of law. Instead, actual knowledge (or “blind-eye” knowledge, where a party deliberately avoids learning of its rights) is required. The Court also distinguished between waiver by election (which requires knowledge) and estoppel (which can arise from words or conduct if the other party relies on these to its detriment, regardless of knowledge).

On the facts, URE’s principal, Mr Ensor, did not know of the right to terminate until advised by solicitors, and there was no evidence of deliberate avoidance. Therefore, URE had not elected to affirm the contract and retained its right to terminate and claim the termination payment.

The Court also upheld the High Court’s interpretation of the termination payment clause, confirming that URE was entitled to 50% of the anticipated future income under the contract, not merely its projected profit.

What are the key takeaway points?

• A party does not waive a contractual right to terminate by continuing performance unless it knows both the facts and the existence of the right. There is no rule that parties are deemed to know all their contractual rights.
• The case highlights a distinction between waiver and estoppel. Waiver by election requires knowledge, whereas estoppel can arise from conduct by a party on which the other party relies to its detriment, even if the first party is unaware of its rights.
• This case could be helpful to lenders in an enforcement scenario, as they will not be deemed to have waived an event of default by their conduct unless it can be shown that they knew both that they had the right to terminate, and that the event of default had been triggered.
• Some caution is required however, as a lender could be found to have had “blind eye” knowledge in such a scenario if they have deliberately avoided discovering their rights. Also, if a borrower had relied on the lender’s conduct to its detriment, there could be an argument that the lender was estopped from enforcing.
• Where a lender becomes aware that an event of default or other breach has occurred under finance documents they should seek legal advice. It may be necessary to take action, such as serving a reservation of rights letter, to avoid waiving their rights by continuing to perform the contract.

Find out more

URE Energy Ltd v Notting Hill Genesis [2025] EWCA Civ 1407 (10 November 2025)

What’s coming up in 2026?

Key finance law developments expected in 2026 include the following:

• ID verification for those filing documents at Companies House: Companies House has confirmed that the requirement for those making a filing at Companies House in relation to a company or an LLP to have completed ID verification or be an Authorised Corporate Service Provider (or officer or employee of an ACSP) will be rolled out by no earlier than November 2026. This had previously been scheduled for roll-out in the Spring. This is a key development for lenders and their lawyers as it will apply to the filing of charges (and notifications of release of charges) at Companies House. We await more information from Companies House on how the new process will work.
• The Building Safety Levy: this will take effect from 1 October 2026. This new tax applies when developers request permission to build certain types of residential buildings in England, and it will be collected by local authorities as part of their building control responsibilities.
• Building Safety (Wales) Bill 2025: while the Building Safety Act 2022 covers Wales, the Welsh Government is adopting a slightly different regime and different implementation timetable to that in England. This Bill establishes a new regulatory framework, requiring certain buildings (at least 11 metres tall or five storeys) to register with a building safety authority. It assigns legal responsibilities to duty holders, introduces both rights and duties for residents, and provides enforcement measures for non-compliance.
• Transition Finance Guidelines: the Transition Finance Council is expected to publish a final version of its Transition Finance Guidelines in Spring 2026, and the LMA, APLMA and LSTA are expected to finalise the Transition Loan Principles during the course of 2026. Transition finance refers to financial products and services designed to support high emitting companies to decarbonise over time.
• HNW Lending Ltd v Lawrence [2025] EWHC 908 (Ch): permission to appeal has been granted in this case, in which the High Court held that a security agent who was not party to a loan agreement could enforce terms of the agreement even though it did not benefit from those terms, under section 1(1)(a) of the Contracts (Rights of Third Parties) Act 1999, as there was express provision entitling the security agent to enforce all the terms of the agreement.