Special features
The goods belong to the hirer until the end of the agreement. The client must not sell them during this period without obtaining the hirer’s permission. The client can choose to return the goods to the hirer at any time during the lifetime of the agreement. The client must first give written notice to the hirer of her/his wish to terminate the agreement. So that there is no doubt as to what the client is doing (particularly if the hirer is threatening to repossess the goods), the letter should refer to the client exercising her/his right to terminate the agreement and request instructions from the hirer on returning the goods.
The amount payable (which the client does not have to pay before either the termination of the agreement or the return of the goods) depends on the amount already paid.
•If less than half the total purchase price (as stated on the agreement) has been paid, the client must pay either half the total purchase price minus the payments already made, or any arrears of payments which have become due by the termination date, whichever is greater. In this context, the ’total purchase price’ is the cash price of the goods plus the charges for credit.
•If more than half the total purchase price has already been paid, the client may return the goods and owes nothing further except any arrears on payments due.
•If the client has not taken reasonable care of the goods, s/he is liable to compensate the hirer.
The FCA takes the view that any ‘deferred payments’ are a ‘liability under the agreement which has accrued’ under s99(2) CCA 1974 and should be taken into account when calculating the amount payable by the client following termination. When clients inform hirers that they can no longer afford the repayments and wish to end the agreement, they are often advised to surrender the vehicle voluntarily. A ’voluntary surrender’ is not the same thing as a termination. A voluntary surrender has the same legal consequences as if the hirer had terminated the agreement and repossessed the goods. While hirers are under no duty to inform clients of their rights, they must not mislead them.
Hirers often put obstacles in the way of clients attempting to end their agreements – eg, by claiming that the client cannot end the agreement if it is in arrears or that the sum due on ending the agreement must be paid as a pre-condition of ending it. This is not correct; the right to end the agreement is unconditional. Default notices issued since 1 October 2008 must contain the following statement: ’You will need to pay X if you wish to end this agreement’ (where X is the amount calculated as above). The former Office of Fair Trading agreed that this sum is the amount the hirer is liable to pay if s/he exercises the right to terminate and is not a condition of termination. However, the regulations have still not yet been amended to reflect this.
If the hirer challenges the client’s right to end the agreement, specialist advice should be sought.
The creditor is not responsible for collecting the goods if a client terminates the agreement and, if the creditor has to collect the goods because the client refuses to return them, the client is liable for any charges incurred. On the other hand, if the creditor insists on collecting the goods, the client should challenge any collection charges the creditor seeks to impose.1See P Madge, ‘Take it Back’, Adviser 106 If the client claims to have terminated the agreement, specialist advice should be obtained if the creditor is nevertheless seeking to recover the total balance due under the agreement. The client loses the right to terminate the agreement if the hirer has already done so or called in the balance due under the agreement.
If the client defaults on payments, the hirer can repossess the goods. It must obtain a court order, unless:
•the client gives permission. This must be free and informed – ie, the client has not been misled about her/his rights; or
•less than one-third of the total purchase price has been paid and the goods are not on private premises.
If the hirer repossesses the goods (including in ’voluntary surrender’ cases where the client returns the goods without terminating the agreement in writing), the client is liable for the outstanding balance due under the agreement, less the sale proceeds of the goods.2First Response v Donnelly, Durham County Court, 16 October 2006 (Adviser 122 consumer abstracts). For a discussion on challenging this approach to creditor termination, see C Meehan and P Madge, ‘Letters’, Adviser 125 and 127. Brighthouse, which is now in administration, has re-opened several of its branches to collect money owed to the company. The administrator has confirmed that clients will not be threatened with repossession of goods. The FCA has said that its Rent to Own guidance (see here) applies during the coronavirus outbreak notwithstanding that the company is in administration. Insurance
Many hire purchase/conditional sale agreements also incorporate credit agreements for insurance sold as part of the same transaction – eg:
•payment protection insurance to cover the repayments in the event of the client’s unemployment, sickness, disability or death;
•mechanical breakdown insurance;
•vehicle recovery insurance;
•accident assistance insurance;
•extended warranties or guarantees; and
•guaranteed asset protection, also known as shortfall insurance, which covers any shortfall if, following an accident, the write-off value of the goods is less than the balance owed to the creditor.
A credit agreement for such insurance (known as the ’subsidiary agreement’) is a different, separate agreement to the hire purchase/conditional sale (known as the ’principal agreement’) . However, a subsidiary agreement for such insurance (but not for any other insurance or products) can be included in the same document as the principal agreement containing only the consumer credit heading and signature box for the principal agreement.
Agreements made before 31 May 2005 should not have included credit for guaranteed asset protection in the subsidiary agreement and any such credit agreement is improperly executed and unenforceable without a court order.3Creditors could avoid this by including two principal agreements in the same document, each containing its own consumer credit heading and signature box Enforcement orders are usually granted on condition that the cost of guaranteed asset protection and its associated credit charges are removed. The consequences of this practice are as follows.
•The client does not have the right to terminate the subsidiary agreement and so termination of the principal agreement does not affect her/his liability under the subsidiary agreement. The client must deal with this separately – eg, settle the agreement early, complain about any mis-selling of the insurance or raise any unenforceability issues.
•When calculating whether the client has paid one-third or one-half of the total price in connection with protected goods and termination rights (see above), you should take into account only the payments due or made in relation to the principal agreement. You should check the one-third and one-half figures in the agreement.
•If the client was required to take out payment protection insurance as a condition of making the hire purchase/conditional sale agreement, it may be that both agreements are irredeemably unenforceable and specialist advice should be sought.
Personal contract purchases
Personal contract purchases (also known as ‘contract purchase plans’) are an increasingly popular form of motor vehicle finance. A personal contract purchase is a form of hire purchase agreement, but differs in one important respect: the client does not pay the purchase price of the vehicle (together with interest). Instead, s/he pays the amount the finance company estimates the vehicle will lose in value (ie, the depreciation over the term of the agreement, typically 24 or 36 months) together with interest minus any deposit by monthly instalments. The resulting figure (ie, the purchase price less depreciation) is known as the guaranteed minimum future value. The monthly payments are usually less than under a standard hire purchase agreement. At the end of the agreement and assuming the client has made all the payments due, the client has the following options.
•Buy the vehicle. The client can pay a ‘balloon payment’, which is a lump sum representing the difference between the guaranteed minimum future value and the original purchase price together with a nominal fee, in order to own the vehicle. This is likely to be more expensive than taking out a standard hire purchase agreement. For more information, see moneysavingexpert.com/car-finance/personal-contract-purchase. •Exchange the old vehicle for a new one under another personal contract purchase. Should the guaranteed minimum future value be more than the actual value of the vehicle, this ‘equity’ can be put towards the deposit on the new vehicle but cannot be taken in cash.
•Return the vehicle. The client has nothing further to pay except possibly:
◦any excess mileage charge. This will arise if the vehicle has done more miles than was agreed at the start of the contract. The finance company uses the estimated mileage in the calculation of the guaranteed minimum future value and so the client needs to be realistic in assessing this in order to avoid the risk of having to pay this charge;
◦the cost of any damage to the vehicle, other than normal wear and tear (as with a standard hire purchase agreement if the vehicle is returned).
As with other hire purchase agreements, the client can voluntarily terminate the agreement and return the car. The issue might then arise as to whether the finance company can recover any excess mileage charges. It is arguable that the legislation (sections 99(2), 100(1) and 100(4) Consumer Credit Act 1974) makes no provision for the recovery of such charges and, indeed, is inconsistent with the right to do so and, therefore, void under section 173. Some finance companies have argued that exceeding mileage limits falls under ‘failing to take reasonable care of the goods’ (section 100(4)), as the value of the vehicle will have been reduced, but ‘reasonable care’ in law generally means the duty to avoid causing physical damage, not pure economic loss. There has to date been no decision by any court on this issue.4See G Skipwith, ‘Consultancy corner: PCPs’, Adviser 185 **Alert: In addition to the FCA guidance on hire purchase agreements (see above), in relation to this type of agreement the FCA has made clear that, when granting a payment deferral or other option to assist clients, finance companies should not recalculate the GMFV based on temporarily depressed market conditions due to the effects of the coronavirus outbreak in an attempt to recover more of the original vehicle value through the periodic payments. Where the agreement comes to an end during the period of the FCA guidance and the client wishes to retain the vehicle but does not have the funds to cover the balloon payment due to financial difficulties related to the coronavirus outbreak, finance companies should work with the client to find an appropriate solution. Where the client wishes to return the vehicle but is unable to do so due to social distancing measures, the finance company should warn the client that s/he should not use the vehicle once the agreement has been terminated or has come to an end.**