Conditional Sales Contracts: Features and Legal Aspects You Should Know

What is a conditional sales contract?

A conditional sales contract is exactly what it sounds like – a sale which is conditional on something happening or not happening in the future. Conditional sales contracts are a common way for people to buy expensive items – especially cars, furniture, and appliances. Your purchase agreement will usually contain a few more terms than a simple I’ll pay you after I get paid or I’ll pay you back next week. One of the most important elements of a conditional sales contract is that it obligates the seller to deliver possession of the property to the buyer, and simultaneously obligates the buyer to make payments over time, before full ownership of the property passes to the buyer.
For example, let’s say you wanted to buy a new truck. The truck costs $60,000 but you only have $10,000. Your local bank agrees to give you a loan of $50,000 with a 7-year term to buy the truck, and a monthly payment of $775. The truck dealer agrees to allow you to take possession now, and to hold the contract for you until you have enough money to pay them off. The car dealer and the bank are both holding conditional sales contracts .
If you breach the contract for any reason (usucapio commercialis), the seller can repossess the property by coming to your place of business and taking ownership of the property once again. This is true even if you’ve paid 99% of the money you owe.
As a buyer, you have the right to redeem (i.e. you can pay the remaining amount due) the contract in the event of a breach. You’ll have a time period in which to redeem outlined in the contract, and you will have to prove your ability to pay during that redemption period.
If the seller decides to keep the property and liquidate (sell off) the property, they must follow the same procedure outlined in the contract. The buyer has the right to buy it back from them at whatever the liquidation price was.
Conditional sales contracts are great for lenders because they allow them to sell the property to the buyer earlier than they would otherwise be able to. For example, the bank gets your business now if they agree to allow the seller (dealer) to possess the truck while you pay for it.
Conditional sales contracts also allow buyers to make payments over a longer stretch of time rather than requiring the buyer to have enough money up front.

How do conditional sales contracts operate?

In a conditional sales contract, the purchaser of the property is not considered the full owner until the final payment has been made and all the conditions have been met. Despite lacking full ownership of the property, the purchaser has what is effectively ownership of the use of the property. This means they can use the property as if they were the owner. The seller retains legal title to the property until the end of the term of the contract, at which point it is transferred to the buyer. Essentially, this means a conditional sale functions in a manner very similar to a lease-to-own contract. Just like with rental properties, the tenant is the individual who lives in and uses the property. However, they do not own the property. In either case, the buyer can be evicted from the property if they are not following the terms of the contract, such as paying the required monthly fees or maintaining the insurance on the property. After the contract term, the buyer owns the property, and the seller no longer has any rights to it. Under a conditional sales contract, the buyer has the right to purchase the property at any point. While most conditions will be set in the original contract, the seller has some room for flexibility. Factors that may influence whether the seller permits you to remove equipment faster than planned include how the local housing market is doing and the amount of equity you have built in. For instance, if the home value has risen significantly since you signed the contract, the seller may permit you to purchase the rest of the home early. Typically, the seller will assign a level of risk to whether they think you may be able to fulfill the contract and decide from there whether they will allow you to purchase the property early.

Benefits and drawbacks of conditional sales contracts

Conditional Sale Agreements do provide certain advantages for both buyers and sellers. Most advantages for buyers and sellers are similar regardless if you are purchasing or selling residential property or commercial property. For example, one of the advantages for purchasers is that the conditional period allows them to arrange financing through a bank or other lending institution. A potential disadvantage for a buyer may be the fact that conditional sales agreements are not binding upon the seller until such time as the the seller has signed the agreement and provided it back to the purchaser. This means that another potential purchaser could approach the seller and offer to purchase the property before the first conditional sale becomes unconditional. This problem is exacerbated if the conditions in the initial agreement provide an incentive for the seller to delay in providing the agreement back to the purchaser.
One of the most significant advantages for a seller is that the buyer agrees to pay a deposit to the seller prior to the nature of the agreement being disclosed, which can be a significant benefit in the case of residential property whose value may be subject to negotiation. A risk for the seller is that the conditions have not been met by the purchaser within the time provided, and in cases where there may be more than one buyer, the seller may have lost time and a potential sale.

Common applications of conditional sales contracts

One of the most common uses for a conditional sale contract is when an automobile purchaser does not have sufficient cash to pay for the car upfront but still wishes to own the vehicle. It is not unusual for automobile dealerships to require a considerable down payment since they do not retain ownership of the vehicle for very long. Some may also insist on having a creditworthy cosigner, especially when the ultimate purchaser is not completely creditworthy.
Conditional sales contracts are also commonly used for more expensive retail sales with an installment payment component. It is often more profitable for a seller of such items to preserve ownership than to grant an immediate transfer of ownership to the buyer. Such uses are distinguished from conventional financing for the purchase of almost any retail item where the buyer actually pays the seller the full price at the time of the sale. In the event that the buyer does not pay the remaining installment payments under a conditional sales contract, the seller may simply repossess the item without going to court.
Nevertheless, conditional sales contracts are not commonly used for retail sales of less expensive items such as personal computers and electronic items. Rather, personal checks are normally used to pay for such items, although they might also be purchased with installment credit cards. Apart from being much easier to repossess a car than a computer, there is considerable uncertainty over whether the same rights are applicable to personal computers as they are to cars.

Legal considerations regarding conditional sales contracts

Conditional sales contracts are subject to a number of legal considerations and regulatory compliance requirements. In the United States, the transfer of ownership interest in any personal property is governed by state laws and the UCC. Compliance with both federal and state laws is necessary to establish and enforce a valid contract of sale. These laws will dictate the terms of the agreement, the obligations of each party, and the procedures to be followed for the transfer of title.
In many states, the seller must provide the buyer with a clear title at the time of delivery of any good. A conditional sale contract allows the seller to retain possession of the good until the terms of the contract have been fulfilled . As ownership of the good is retained by the seller until full payment is made, the sale may be treated as a secured loan. As a result, the Universal Commercial Code and state regulations that govern secured loans may apply to the transaction. It is important that parties fully understand their obligations under the laws and regulations that apply to a conditional sale contract.
Another important consideration is the consideration or payment to be made in exchange for the good. The seller may not require that the buyer pay more than the full value of the good as consideration for the good. Similarly, the seller may not modify the terms of the agreement, such as the interest rate or payment amount, unless agreed upon, in writing, by the parties.

Ending a conditional sales contract

Either party to a conditional sales contract can end the contract before the end term. Failure to pay or to perform as agreed can be grounds for cancellation by one of the parties. If a buyer fails to make a payment, the seller can cancel, or terminate, the contract and declare the entire amount owed. The seller must give notice of cancellation to the buyer. If the seller fails to give notice to cancel or provides late notice, the buyer is entitled to "cure" the default period. The seller must give a reasonable time for the buyer to cure the default. The statute does not define "reasonable time," but case law places the burden on the seller to put the buyer on notice of the cancellation. In other words, the seller must give notice of cancellation in order to enforce the terms of the contract. While the seller can act to cancel the contract upon default, the buyer can only cancel upon completion of all conditions precedent to contract formation. If the parties to a contract of conditional sale have executed the contract, and the buyer does not make required payments, the party to whom default is given can, upon written request, get a statement from the seller showing the amount owed. The statement must state: A more detailed version of the statement can be provided upon request by a diligent buyer. It shall be sent within ten days after the request. This protects the buyer by ensuring that the seller gives an accounting prior to repossession of the goods.

Tactical considerations when crafting a conditional sales contract

Negotiating terms in a conditional sales contract is essential for ensuring that both parties are satisfied with the agreement and that the conditions are met in a timely manner. Here are some strategies for negotiating terms in a conditional sales contract:

• Understand your needs and capabilities: As the buyer or seller, it’s crucial to understand your own abilities and requirements before negotiating terms. For example, you should know whether you can afford the purchase price or whether the conditions are reasonable given your business capabilities.
• Prioritize terms: Make a list of the terms or clauses that you consider most important. This will help you to avoid giving up more than you can afford or taking on terms that may be difficult to fulfill. Having a clear idea of priorities will allow you to negotiate effectively to achieve your goals for the contract.
• Offer alternatives: If you feel that a particular term is unreasonable, don’t be afraid to offer a reasonable alternative, either in its place or to replace another term that you find equally objectionable.
• Keep communication open: Failure to communicate is a common pitfall of contract negotiations. Make sure that you are responsive to any questions or concerns that the other party may have , and that you ask for immediate clarification if you do not understand a particular term.
• Remember that this is a negotiation, not a taking: There is a fine balance between protecting your business interests and being so domineering that the other party is unwilling to do business with you in the future. This situation, unfortunately, occurs more often than you might think. Legislators have attempted to address this by enacting quasi-contracts that protect a party whose interests are taken advantage of. Make sure that you do not take too much, and deal fairly with the other party.
• Speak with an experienced contract lawyer: When entering into a conditional sales contract, it’s always good to have a lawyer on your side who can provide you with strategies for achieving your goals, and to review the contract to make sure that it is legally sound. An experienced professional can also spot potential legal issues that you would otherwise miss, along with proposing solutions.

With these strategies and tips, you can be sure that your conditional sales contract will be mutually beneficial for both you and your negotiating partner.