L7 Biz Law

L7 BIZ LAW
HIRE PURCHASE AND EQUIPMENT LEASING
HIRE PURCHASE
Definition
Simply put, a hire-purchase contract is an agreement whereby the possession of goods is delivered
to a person, who agrees to make payments periodically, and with an option of buying the goods
after the agreed installments have all been paid. The chapter also introduces readers to the
distinction between operating and finance leases.
A hire-purchase agreement is an agreement under which the owner of goods hires them to another
person called the hirer, the agreement also providing that the hirer shall have the option to buy the
goods if and when the number of instalments specified in the agreement had been paid.
The above definition clearly shows:

a. There is no obligation on the hirer to pay all the installments;
b. Until the option is exercised there is no agreement to buy the goods. We can then safely
say that a hire-purchase contract consists of 3 parts:
i. a contract of bailment under which the hirer obtains possession of the goods while
ownership remains in the owner and so uses them before they are fully paid up;
ii. an option in favour of the hirer entitling him after payment of the periodical instalments
and usually for a nominal consideration to purchase the goods; and
iii. if the hirer exercises the option, a contract of sale making him the owner of the goods
already in his possession.
Distinction between hire purchase and other credit transactions

This is an agreement by which the seller sells and transfers ownership in goods (i.e. property) to
the buyer and agrees to accept payment by installments. The buyer is the owner of the goods and
not merely a hirer of them. If he defaults in paying the installments, the seller's remedy is an action
for the accrued installments but not for recovery of possession of the goods.
Conditional sale agreement

This is an agreement for the sale of goods under which the purchase price is payable by
installments, until the last installment is paid and the property in the goods is to remain in the seller
(not withstanding that the buyer is to be in possession of the goods) until such conditions as to the
payment of installments or otherwise as may be specified in the agreement are fulfilled. The
difference between a hire purchase contract and a conditional sale agreement this is that there is
an obligation, in the latter and not merely an option to purchase the goods as it obtains in the
former.
Parties to hire purchase agreement
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There are usually two parties to a hire purchase agreement, that is, the Owner-who undertakes to
let out the goods on hire with an option to purchase when all payments have been made, and the
hirer-who undertakes to pay the hire purchase charges that are involved.
Duties of parties to hire purchase contract
Duties of owner
The duties of the owner under hire purchase contract are:
(a) Duty to disclose the cash price of the goods to the hirer at the inception of the
contract;
(b) That he has valid title in the goods, subject matter of the contract;
(c) Duty to give the hirer quiet possession of the goods;
(d) Duty to deliver the goods to the hirer
(e) Duty to accept installment payment from the hirer;
(f) Duty to deliver exact quantity of the goods agreed upon; and
(g) Duty not to repossess the goods, subject matter of the contract, except a motor
vehicle.
Rights of the owner

The owner has the following rights under a contract of hire purchase:
(a) The right to information from the hirer about the goods;
(b) The right to re-possess the goods where the agreement is determined by the hirer or the
court; and
(c) The right to repossess the goods if it is a motor vehicle, for safety, even when a relevant
portion of the installments has been paid, without recourse to the court.
Duties of the hirer

The hirer has the following duties to:
(a) Accept the goods subject to the contract;

(b) Pay the installments as and when due; and
(c) Disclose information about the goods to the owner as and when required by the owner.
Rights of the hirer

The hirer has the right to:
(a) Use the goods;

(b) Quiet possession and enjoyment of the goods;
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(c) Know the exact installments to be paid and the cash price of the goods; and
(d) Choose the insurer and garage to maintain the goods or motor vehicle.
Termination of hire purchase agreement

A hire purchase agreement may be terminated by any of the following circumstances:
(a) Mutual agreement of the parties to rescind the agreement;

(b) Performance of all the obligations under the agreement;
(c) Provisions in the agreement which allows the hirer to terminate the contract at any stage of the
agreement without prejudice his option to purchase the goods;
(d) Supervening circumstances such as fire, destruction, act of God, and other events beyond the
control of the parties;
(e) Repudiation by the aggrieved party who may sue for a breach of terms of the contract; and
(f) An order or judgment of court for conversion or detinue.
Operating and finance lease

- The acquisition of assets - particularly expensive capital equipment - is a major
commitment for many businesses. How that acquisition is funded requires careful planning.
- Hire purchase and leasing represent the most common sources for financing the acquisition
of assets. Both leasing and hire purchase are similar in that they are means through which
an individual may use an asset over a fixed period, in return for regular payment.
- The customer chooses the equipment and the finance company buys it on behalf of the
customer.
- A lease is an agreement between two parties, the "lessor" and the "lessee".
- In a lease arrangement, ownership never passes to the customer, but as with hire purchase,
the hirer shall have the option to buy the goods if and when the number of installments
specified in the agreement had been paid.
- The common types of equipment leasing arrangements are operating leasing, financial
leasing, sales and lease back, and leveraged leasing.
Operating lease
Under this type of lease the lessee acquires the right to use the asset for a short period, e.g., a week
or month. The lease may be renewed after the expiry of the period. This arrangement is adopted in
case of assets, which are subject to rapid technological advancements, e.g., computers. Operating
lease is relatively more expensive.
Finance lease:
This lease is for a basic term during which the agreement cannot be cancelled. The length of this
basic term depends on the economic life of the asset and is usually shorter than the expected life
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of the asset. This arrangement enables the lessee to use the asset after the expiry of the basic period,
or alternatively the lessee may buy the asset at a negotiated price on the termination of the lease.
Financial lease is commonly used in case of land and buildings and very expensive equipment.
The lessor generally is able to recover his investment in the asset during the lease period.
Features of operating lease

Operating leases are rental agreements between the lessor and the lessee whereby:
a) The lessor supplies the equipment to the lessee
b) The lessor is responsible for servicing and maintaining the leased equipment
c) The period of the lease is fairly short, less than the economic life of the asset, so that at the end
of the lease agreement, the lessor can either
i i) Lease the equipment to someone else, and obtain a good rent for it, or
ii ii) sell the equipment second hand.
Finance leasing
The finance lease or 'full payout lease' is closest to the hire purchase alternative. The leasing
company recovers the full cost of the equipment, plus charges, over the period of the lease.
Although the business customer does not own the equipment, they have most of the 'risks and
rewards' associated with ownership. They are responsible for maintaining and insuring the asset.
When the lease period ends, the leasing company will usually agree to a secondary lease period at
significantly reduced payments. Alternatively, if the business wishes to stop using the equipment,
it may be sold second- hand to an unrelated third party. The business arranges the sale on behalf
of the leasing company and obtains the bulk of the sale proceeds.
Features of finance leasing

(a) Finance leases are lease agreements between the user of the leased asset (the lessee)
and a provider of finance (the lessor) for most, or all, of the assets expected useful life;
(b) The lessee is responsible for the upkeep, servicing and maintenance of the asset; the
lessor is not involved in this at all;
(c) The lease has a primary period, which covers all or most of the economic life of the
asset. At the end of the lease, the lessor would not be able to lease the asset to someone else, as the
asset would be worn out. The lessor must, therefore, ensure that the lease payments during the
primary period pay for the full cost of the asset as well as providing the lessor with a suitable return
on his investment; and
(d) It is usual at the end of the primary lease period to allow the lessee to continue to lease
the asset for an indefinite secondary period, in return for a very low nominal rent. Alternatively,
the lessee might be allowed to sell the asset on the lessor's behalf (since the lessor is the owner)
and to keep most of the sale proceeds, paying only a small percentage (perhaps 10%) to the lessor.
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L7 BIZ LAW

HIRE PURCHASE AND EQUIPMENT LEASING

The above definition clearly shows:

Distinction between hire purchase and other credit transactions

Conditional sale agreement

Duties of parties to hire purchase contract

Rights of the owner

Duties of the hirer

(a) Accept the goods subject to the contract;

Rights of the hirer

(a) Use the goods;

Termination of hire purchase agreement

(a) Mutual agreement of the parties to rescind the agreement;

Operating and finance lease

Features of operating lease

a) The lessor supplies the equipment to the lessee

Features of finance leasing

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