Commercial security – hire purchase and conditional sale

In order to acquire a superior position on the debtor’s insolvency, a creditor may take some form of commercial security. It is imperative that lenders fortify their position by incorporating a negative pledge in their loan documents. This should preclude the borrower from creating any subsequent legal and commercial security in favour of other creditors.

The original lender would generally want to prohibit a ‘hire purchase and conditional sale’. By giving this type of commercial security to another entity, the borrower would be relinquishing their ownership of the pertinent asset and would consequently be unable to give any legal security over the aforementioned.

A hire purchase is essentially a type of leasing agreement which enables the lessee to acquire title to the asset for a minimal sum once the hire period has ended. Prior to the end date, the lessor retains title to the asset. It is important to note that the lessee may not wish to acquire title to the asset they are certainly not obliged to do so. Furthermore, it is worth mentioning that any laws pertaining to the sale and supply of goods e.g. the Sale of Goods Act 1979 are not applicable to a leasing agreement.

A conditional sale agreement is quite similar to a hire purchase. Title to the asset will only pass when the instalments have been paid. Lastly, as this is a contract of sale, the Sale of Goods Act 1979 and all related legislation apply.

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