In a judgment dated 24 November 2016, the Court of Cassation ruled on the limitation of break costs that banks can claim in the case of early repayment of a loan.

Principle

A funding loss is compensation for the loss sustained by a lender due to early repayment of a loan. Under Belgian law, the maximum funding loss compensation (break costs) for loans must be limited to six months' interest (article 1907bis Civil Code). The interpretation of this seemingly straightforward provision has long been disputed.

Not applicable to credit facilities

Under article 1907bis of the Civil Code, the break cost limitation only applies to loans. Traditionally, it has been accepted that this provision does not apply to credit facilities. The difference between a loan and a credit facility is not always clear in practice, and Belgian legal authors and case law are not crystal clear about the difference. The Court did not address that debate in its judgment of 24 November 2016, but it seems to have implicitly confirmed the principle that the break cost limitation is not applicable to credit facilities. The Constitutional Court already held in 2013 that the distinction between a loan and a credit facility does not violate the principle of equality.


Scope of article 1907bis

Another important uncertainty in relation to the interpretation of article 1907bis of the Civil Code was the question whether the break cost limitation would also apply to loan agreements prohibiting early repayment. The Court further clarified and confirmed its earlier judgment from 2013. It clearly stated that this limitation is applicable to any compensation owed by the borrower to the lender upon full or partial repayment of a loan, regardless of whether early repayment was excluded in the agreement.

No impact on the SME Financing Act

The judgment of the Court of Cassation of 24 November 2016 has no impact on the interpretation of a similar provision in the Act of 21 December 2013 on the financing of SMEs, in which – under certain conditions – break costs in relation to loans provided to SMEs are limited to a maximum of six months' interest.