Special features
The goods belong to the hirer until the end of the agreement. The client must not sell them during this period without the hirer’s permission. The client can choose to return the goods to the hirer at any time during the agreement’s lifetime. The client must first give written notice to the hirer of their 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 their 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, they are liable to compensate the hirer.
The FCA takes the view that any ‘deferred payments’ are a ‘liability under the agreement which has accrued’ under section 99(2) CCA 1974 and should be considered 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 they exercise the right to terminate and is not a condition of termination. However, the regulations have still not 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 their rights; or
•less than one-third of the total purchase price has been paid and the goods are not on private premises.
Where the client has paid one-third or more of the total purchase price, the goods become ‘protected goods’ and the hirer is not allowed to repossess those goods from the client as the result of a breach of that agreement by the client without a court order (unless the client has consented to the repossession as above). If the hirer repossesses protected goods in breach of these provisions, the CCA 1974 provides severe sanctions: not only is the agreement terminated (if not previously terminated), but also the client is released from all further liability under the agreement and is entitled to recover from the hirer all sums they have already paid under the agreement.2ss90 & 91 CCA 1974. In Santander Consumer (UK) plc v Chaudhry [2024] EWHC 170 (KB), the High Court held that these sections only applied where goods are recovered from the debtor or their agent, but not from a third party. Therefore, when Ms C’s motor car was driven with her consent by her brother - who was uninsured and banned from driving - and was repossessed by SC from the police compound, where it had been taken following seizure by the police, the sections did not apply. 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.3First 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. Insurance
Many hire purchase/conditional sale agreements also incorporate credit agreements for insurance sold as part of the same transaction – eg:
•payment protection insurance (PPI) 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;
•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.
•The client does not have the right to terminate the subsidiary agreement and so termination of the principal agreement does not affect their 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 PPI 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 purchase
Personal contract purchase (PCP) (also known as ‘contract purchase plans’) is an increasingly popular form of motor vehicle finance. PCP 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, they pay 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 (GMFV). 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 GMFV 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 .
•Exchange the vehicle for a new one under another PCP. Should the GMFV 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 GMFV and so the client needs to be realistic in assessing this 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) of the 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, is 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 vehicle’s value 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