Don't accept candy from a stranger
In the recent case of Holyoake v Candy  EWHC 3397 (Ch) the billionaire property developers Nick and Christian Candy were cleared of claims that they extorted money out of a former business associate, Mark Holyoake.
Holyoake sought a loan from the Candy brothers in July 2011, requesting money at short notice in order to complete the purchase and redevelopment of a mansion block in Grosvenor Gardens, central London for £42.5m. Holyoake planned to convert the building from offices to luxury flats.
CPC Group, the Guernsey-based property business run by Christian Candy lent Holyoake £12m. Under mounting pressure, Holyoake entered into a series of further loan agreements which ultimately required Holyoake to repay the £12m loan plus a further £37m.
The acrimonious high court case contained allegations of threats, extortion, coercion as well as claims that certain terms of the loan agreement amounted to penalty clauses and were therefore unenforceable.
In the case of Cavendish Square Holding BV v Talal El Makdessi  UKSC 67 the Supreme Court established that primary obligations are not subject to the penalty rule. A penalty must be a secondary obligation. Secondary obligations arise where a contract requires one party to perform an act and, if s/he does not perform it, s/he must pay the other party a specified sum of money. If that specified sum of money is out of all proportion to the legitimate interests of the non-defaulting party it may be considered to be oppressive and/or unconscionable and, therefore, an unenforceable penalty.
Under the terms of the first loan agreement, on any early repayment of the loan, Holyoake had to pay CPC Group the full amount of interest as if the loan had been repaid at the end of the term. This equated to £5.74m. However the judge ruled that the term requiring payment of a minimum amount of interest was not a penalty, as it did not operate on breach. Indeed, it was Holyoake's primary obligation to repay the full amount of £17.74m on any repayment of the loan, whether the repayment was made early or at the end of the term.
Holyoake managed to negotiate more time to repay the loan, however the Candy brothers extracted a succession of extension fees adding up to £7.5m to extend the term of the loan. Each extension fee represented the price to extend the term of the loan. The extension fees therefore could not be deemed to be a penalty either, as they were primary obligations and did not operate on breach.
Under the terms of the extension agreements Holyoake's indebtedness to CPC Group capitalised so all accrued interest and fees were added to the principal amount of the loan. Pursuant to the terms of the extension agreements, interest was then charged on this new loan amount. Holyoake contended that this had the effect of double counting interest. The judge held that this term represented the price that CPC Group was willing to extend the term of the loan and was not a penalty.
The rule against penalties is not to protect contracting parties from entering into bad contracts, but rather to protect against punitive damages for a breach. So beware of excessive fees or repayment provisions.
Please note this is a first instance decision and Holyoake has said he may appeal the judgement.
Ben is an associate on our Banking & Finance team.