The default rate is a contractually agreed higher rate of interest that becomes payable when a borrower defaults on obligations under a property development finance facility. It is designed to reflect the increased credit risk and administrative burden associated with non-compliance. Unlike standard interest, the default rate typically applies automatically upon default events such as missed payments, covenant breaches, or insolvency. In UK property development finance agreements, the default rate must be commercially justifiable and clearly documented to ensure enforceability.
In practice, the default rate acts as a contractual enforcement mechanism within the wider framework of Litigation, Disputes, and Enforcement, providing lenders with additional compensation where a development facility moves into default. Developers will often see default rate provisions triggered alongside events that may also give rise to Default Interest, although the precise operation and calculation of each should be reviewed carefully within the finance documents. The financial impact can be particularly significant where higher-cost funding such as Fixed Interest Mezzanine forms part of the capital structure, as increased borrowing costs during a default period can materially affect project cash flow, refinancing options, and overall scheme profitability.
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