Conditional sale agreement

From CEOpedia | Management online

Conditional sale agreement is a kind of borrowing or installment purchase. The person making a purchase agrees to pay the price or part of it in installments, usually monthly or quarterly. Over this time period, seller is still the owner of sold goods. Legal title of ownership is given to the purchaser only after paying all the installments. It's often called "getting good title"[1].

When speaking about common law, there's one major difference between conditional sale agreement and hire-purchase contracts: in the case of conditional sale agreement, the purchaser can sell the good title to another third party entity, if he sells it before paying all the installments. Under hire-purchase contract, purchaser can't do that[2].

Differences between conditional sales and other agreements

Conditional sale agreement is very similar to hire-purchase contract and credit-sale agreement. There are few key differences between them though[3]:

  1. Credit-sale agreement - In this case, buyer agrees to pay the price in installments as in conditional sale, but he obtains the good title instantly after signing the contract. The legal title is transferred immediately.
  2. Hire-purchase agreement - Similar as in both previous agreements, buyer agrees to pay the price of goods in installments, but the main difference here is, that the buyer doesn't receive the ownership of the goods by default. He has to pay an additional sum of money, during or after paying all the installments. Without that additional payment, buyer has to return the goods to the seller. In conditional sale agreement, buyer receives the ownership after paying all installments, while under hire-purchase contract, buyer is not obliged to take the ownership. This case is often used by "rent-to-own" retailers.

Ending an agreement

Purchaser can end the conditional sale agreement or hire-purchase agreement at any given time during the installment payment period. Goods have to be returned to the seller immediately, and all the due installments have to be finished (from the time before the agreement cancellation date). If the buyer did process less than half of all the installments, he may still have to pay required sum to balance it out. If the buyer paid more than half of the installments, no refund will be issued[4].

Examples of Conditional sale agreement

  • Car Sales: A common example of a conditional sale agreement is the purchase of a car. A person may not have enough cash to pay for the car upfront, but can pay a down payment and make monthly payments until the car is paid off. The car dealer retains legal title to the car until all payments have been made, at which point the title is transferred to the buyer.
  • Furniture: Another example of a conditional sale agreement is the purchase of furniture. A buyer may make a down payment and agree to pay the rest in monthly installments until the furniture is paid off. The furniture company retains legal title to the furniture until all payments are made, at which point the title is transferred to the buyer.
  • Real Estate: A third example of a conditional sale agreement is the purchase of real estate. A buyer may make a down payment and agree to pay the rest in monthly installments until the real estate is paid off. The seller retains legal title to the real estate until all payments are made, at which point the title is transferred to the buyer.

Advantages of Conditional sale agreement

A Conditional Sale Agreement is a form of borrowing that allows an individual to purchase a good and pay for it over a long period of time in installments. It has the following advantages:

  • It allows individuals to purchase costly goods without having to pay for them in full up front.
  • The agreement may include a lower interest rate than other types of borrowing.
  • The seller retains legal title to the goods until the purchaser pays off the entire balance. This provides the buyer with greater protection if the goods turn out to be faulty or if the seller fails to deliver the quality of goods that was initially promised.
  • The buyer has the option to pay off the balance at any time without penalty.
  • The agreement can be tailored to meet the individual buyer's needs. This can include the installment amount, length of the agreement, and type of payment.

Limitations of Conditional sale agreement

  • A conditional sale agreement limits the rights of the buyer, who may not be able to transfer ownership or use the purchased item until the full amount is paid.
  • The seller has the right to repossess the item if the buyer fails to make payment in time.
  • The buyer has to pay interest on unpaid balance, which may be expensive.
  • Depending on the terms of the agreement, the seller may have a lien on the item until the full amount is paid.
  • The seller may have to bear the cost of repossession if the buyer fails to make payments.
  • The buyer may not be able to return the item if he/she is not satisfied with it.
  • The seller may add additional fees and interest, which may not be known to the buyer before signing the agreement.

Other approaches related to Conditional sale agreement

A Conditional Sale Agreement is just one of the approaches to borrowing or installment purchases. Other approaches include:

  • Hire Purchase Agreement - In a hire purchase agreement, the buyer agrees to pay the purchase price in installments and the seller agrees to transfer the legal title of the goods to the buyer after the full payment is made.
  • Lease Agreement - A lease agreement is a contract between the purchaser and the seller in which the purchaser agrees to pay the purchase price over a period of time and the seller agrees to transfer the ownership of the goods to the purchaser.
  • Credit Agreement - Credit agreements are contracts between the purchaser and the seller in which the purchaser agrees to pay the purchase price in monthly instalments, and the seller agrees to transfer the ownership of the goods to the purchaser after the full payment has been made.

In summary, a Conditional Sale Agreement is just one of the approaches to borrowing or installment purchases, and other approaches include hire purchase agreements, lease agreements and credit agreements.

Footnotes

  1. ↑ Boczko T., 2016, p. 51
  2. ↑ Owens K., 2013, p. 509
  3. ↑ Boczko T., 2016, p. 51
  4. ↑ Boczko T., 2016, p. 52


Conditional sale agreement — recommended articles
Contract hire — Vendor take-back mortgage — Back-To-Back Letters Of Credit — True lease — Mortgage deed — Conditional contract — Transferable letter of credit — Exclusive agency agreement — Gift letter

References

Author: Jakub Urban

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