Cardiff Legal

Here is an example of vehicle fin­ance gone wrong. A self-​employed busi­ness­man agreed to a Con­di­tional Sale con­tract with a well known fin­ance com­pany to acquire a second hand Audi A4, worth over £24,000 for both busi­ness and per­sonal use. The car had done rel­at­ively little mileage but the busi­ness­man exper­i­enced prob­lems soon after tak­ing possession.

The vehicle was repaired under war­ranty but, after more than ten repairs in a year, the busi­ness­man tried to reject it and ter­min­ate the agree­ment. How­ever, the sup­plier refused to take the vehicle back and the fin­ance com­pany rejec­ted his request on the basis that they were never told of any prob­lems, the busi­ness­man hav­ing dealt only with the supplier.

He stopped pay­ing the fin­ance com­pany and they held him in default of the agree­ment. By the time he had sought legal advice, the vehicle was undriv­able, yet he was £2,000 in arrears with a fur­ther £14,000 outstanding.

Con­di­tional Sale

We look at sources of busi­ness fin­ance — includ­ing Hire Pur­chase and Con­di­tional Sale — in more detail in our Busi­ness Fin­ance post. But it is import­ant to dis­tin­guish the dif­fer­ence between Con­di­tional Sale and other forms of finance.

For instance, a Con­di­tional Sale agree­ment is very dif­fer­ent to a bank loan. Whereas with a loan the bor­rower uses the funds to pur­chase a vehicle out­right, in a Con­di­tional Sale the Fin­ance com­pany buys the vehicle and effect­ively ‘hires’ it back to the bor­rower. The fin­ance com­pany has legal title to the vehicle and the bor­rower pays a monthly charge for its use.

Cru­cially, the agree­ment is ‘Con­di­tional’ on the bor­rower mak­ing a final pay­ment — some­times known as a ‘bal­loon pay­ment’ — to pur­chase the vehicle out­right. Unlike with Hire Pur­chase, this pay­ment is not optional. It is integ­ral to the con­tract. This par­tic­u­lar agree­ment was classed as a Reg­u­lated agree­ment under the Con­sumer Credit Act 1974.

Why is this important … ?

… Because, not all Con­di­tional Sale agree­ments are reg­u­lated. Again, this is explained in more detail in our Busi­ness Fin­ance blog, but the sig­ni­fic­ance of this agree­ment being a reg­u­lated agree­ment is that the Act provides cer­tain pro­tec­tion to Con­di­tional Sale bor­row­ers. For example:

• If the bor­rower has fallen behind in their pay­ments, but has repaid more than a 3^rd of the total amount under the agree­ment, the vehicle can­not be repos­sessed by the fin­ance com­pany without a court order;
• If the bor­rower has paid more than ¹⁄₂ of the total repay­ments he can return the vehicle to the fin­ance com­pany without pen­alty, con­sid­er­ing that the con­di­tion of the vehicle is satisfactory;
• In real­ity the agree­ment can be ter­min­ated at any time if the bor­rower pays up to ¹⁄₂ of the total amount pay­able (Vol­un­tary Termination).

Need­less to say, Fin­ance Com­pan­ies are not fans of the ¹⁄₃ and halfway rules. The industry has com­plained of mak­ing huge losses because cus­tom­ers are using the halfway rule more than ever, but the value of the vehicles returned are often less than 50% of the value of the agree­ment. In fact, because interest is already factored into each monthly pay­ment, the fin­ance com­pany is not mak­ing a loss but is more likely los­ing profit.

To coun­ter­act this “loss”, fin­ance com­pan­ies have stra­tegic­ally increased the amount of the final “bal­loon” pay­ment so that it rep­res­ents a greater per­cent­age of the total amount pay­able. The idea is that the bor­rower is less likely to return the vehicle before the final pay­ment is due. Also, if the repay­ment term is shorter, the bor­rower may not want to lose any invest­ment in the vehicle by vol­un­tar­ily ter­min­at­ing, unless he felt he had received suf­fi­cient value from it.

I digress … The resolution

In this par­tic­u­lar case, the busi­ness­man was in a bad pos­i­tion. The fin­ance com­pany wanted to ter­min­ate the agree­ment and repos­sess the vehicle. They would then sell the vehicle — in its dam­aged state it would only recover a frac­tion of its true value — and seek the dif­fer­ence from the businessman.

But the busi­ness­man argued that they were in breach of con­tract for fail­ing to rem­edy the vehicles inher­ent faults. In these cir­cum­stances the law says the fin­ance com­pany is liable for such faults because it retained legal title. Effect­ively, both sides were in breach of contract.

The fin­ance com­pany could not repos­sess the vehicle without a court order because the busi­ness­man had paid more than a third of the repay­ments. They even­tu­ally agreed to co-​ordinate repairs, on the con­di­tion that a replace­ment would be provided if the vehicle could not be repaired. The busi­ness­man agreed to resume pay­ments immediately.

In real­ity, the busi­ness­man avoided being taken to court and the fin­ance com­pany avoided the cost and inev­it­able risk of mak­ing a legal claim for repos­ses­sion of the vehicle. Due to good legal advice and inter­ven­tion, the busi­ness­man was poten­tially saved thou­sands of pounds and ended up with a reli­able vehicle.

If you have a ques­tion about busi­ness fin­ance you can Con­tact Us for a free con­sulta­tion. Or you’re wel­come to com­ment on this blog.

Cardiff Legal