Default Interest
Default interest is a higher interest rate which is payable if a party to an agreement fails to fulfil an obligation to the other party. Typically, commercial arrangements, settlements and the vast majority of loan agreements contain default interest clauses.
Default interest clauses are often seen in the standard terms of a loan agreement. The ordinary interest rate in a loan agreement might be 6.24% per annum. If the borrower was to miss a repayment, the agreement might require that party to pay a higher interest rate of, say, 11.24% on the sum that was not paid.
Default interest must be set at a reasonable commercial rate, which constitutes a genuine pre-estimate of loss to the innocent party in the event of default. Factors material to ascertaining a reasonable commercial rate include the nature of the business, the industry, the economic climate and interest rates charged by major lenders such as banks.
Default interest cannot, by law, be used as a tool to penalise a defaulting party. The term “penalty” applies to punitive default interest rate clauses within a contract. Essentially, this is where a contract is designed to make the consequences of a breach so daunting that a debtor will not default. Default interest clauses which constitute a penalty are unenforceable, even where parties agree to such a clause at the outset of the agreement.
Trusts – A Brief Summary
A trust is an arrangement in which a person (Settlor) transfers assets to selected persons (Trustees) to be held for the benefit of persons named by the Settlor (Beneficiaries).
A trust is usually established by way of a trust deed but can be created via less formal means. Once the trust is created, the Settlor loses legal ownership of the transferred assets; the Trustees then become the legal owner(s) of the trust assets.
The Trustees have a duty of the utmost good faith to both the Settlor and the Beneficiaries, and to deal with the trust assets in line with the terms of the trust together with the Trustee Act 1956.
The Beneficiaries are the only people entitled to benefit from the trust’s assets. Any person (including corporate persons such as companies) can be a beneficiary of a trust, whether that person is alive or unborn. A Settlor may appoint themselves as a Beneficiary.
When establishing a trust, it is vital that the Settlor considers who he or she will appoint as the Trustees and Beneficiaries. To do so, it is important to understand the roles, responsibilities and rights of each participant in the trust, and to take advice from experts.
