How To Draft Hire Purchase Agreement (2023)- A Complete Guide | Hire Purchase Agreement Format

How To Draft Hire Purchase Agreement (2023)- A Complete Guide | Hire Purchase Agreement Format | Hire Purchase Agreement pdf download | Download Hire Purchase Agreement sample format | Sample Format of Hire Purchase Agreement | Essentials of Hire and Purchase Agreement in 2023.

Hire Purchase Agreement

Hire-purchase agreements have acquired special importance in the developing economy of the country. What does hire-purchase agreement connote ? By a contract of hire-purchase is meant a contract which in addition to terms of hire, provides that on payment of the rent for a certain period, or for a certain number of times, or on the payment of a certain sum after such payment of rent, or at some time during the hiring, the property in the goods hired shall (or may) pass from the owner to the hirer. [Periars Law of Hire and Hire-Purchase 2nd Ed., p.2]. In effect hire-purchase agreement is a contract of bailment and is governed by the provisions of Chapter IX of the India Contract Act, 1872.

This agreement is with an option to purchase though it is sometimes used in a wider sense to include agreements where there is an irrevocable agreement to buy in instalments are paid. A hire-purchase agreement thus creates a bailment, but is a bailment plus an option to purchase. The transaction is composed of the element of both the law of hire and sale, it would be clearly wrong to assimilate it to a hypothecation of moveable property .[V. Dakshinamurthi Mudaliar v. General & Credit Corporation (India) Ltd., AIR 1960 Mad. 328, 330].

 

Difference between Hire Purchase Agreement and Sale

It has to be remembered that a hire-purchase agreement is not a sale even if it contains a stipulation in the form of option of the hirer to purchase the article hired. Even where the price for sale is to be pain in instalments later, the property in the goods passes as soon as the sale is made. This follows from the definition of sale in section 4 of the Sale of Goods Act, 1930 (as distinguished from an agreement to sell) which requires that the seller transfers the property in the goods to the buyer for price.

The essence of sale is that the property is transferred from the seller to the buyers for a price whether paid at once or paid later in instalments. On the other hand , a hire-purchase agreement as its very name implies, has two aspects.

There is first an aspect of bailment of the goods subjected to the hire-purchase agreement, and there is next an element of sale which fructifies when the option to purchase, which is usually a term of hire-purchase agreements, is exercised by the intending purchaser.

Thus the intending purchaser is known as the hirer so long as the option to purchase is not exercised, and the essence of the hire-purchase agreement properly so called is that the property in the goods does not pass at the time of the agreement but remains in the intending seller, and only passes later when the option is exercised by the intending purchaser. The distinguished feature of a typical hire-purchase agreement is made but only passes when the option is finally exercised after complying with all the terms of the agreement. [K.L. Johar & Co. vi Dy CTO, AIR 1955 SC 1082,1088].

Parties to Hire Purchase Agreement

Normally , there are two parties to the hire-purchase agreement, viz., the owner and the hirer. However, sometimes a financier, for example in case of motor vehicles, is also brought in as a necessary party who purchase the vehicle from the owner and lets the same on hire to the hirer on instalments and in such case, a guarantor is also required to be supplied by the hirer to secure fulfilment of the obligations imposed on the hirer under the agreement.

How To Draft Hire Purchase Agreement

 

While Drafting a Hire and Purchase Agreement following steps or Clauses must be added in the agreement:

(a) No obligation to buy.-

The agreement of hire-purchase should not amount to an agreement to buy but it should only give the hirer an option to purchase because where a person under an agreement to buy obtains the possession of the goods and the hirer under the hire-purchase agreement so obtains the possession, he would be able to give little to any one who takes the goods on sale or pledge from him without notice of the hire purchase agreement [See section 30 (2) of the Sales of Goods Act, 1930 and thereby the hirer would be able to defeat the intention of the owner. Where, however, the agreement is not an agreement to buy but it merely give an option to the hirer to buy on the fulfillment of certain conditions, the hirer cannot gives a valid title to any one. [Roopchand Jankidas v. National Bank, 46 Cal. 342].

(b) Property in goods not to pass.

A hire-purchase agreement must contain an express stipulation that the property in the goods shall not pass of the hirer untill all instalments have been paid.

(c) Minimum payment clause

A hire-purchase agreement may be terminated either by the owner or hirer and the hirer may return the article to the owner after terminating the agreement. But since the articles are subject to usual wear and tear on account of user, it is usual to insert a minimum payment clause in the agreement in order to provide for depreciation of the article taken under the hire-purchase agreement. Such a clause provides that in the event of the agreement being determined by the owner or the hirer, the hirer shall be liable to pay 50% of the total price after deduction of the instalments already paid by the hirer.

(d) Seizure clause.-

It is also usual to incorporate a clause in the hire-purchase agreement empowering the owner to seize the article hired in the event of the hirer committing a breach of any terms thereof, particularly the non-payment of monthly hire.

 

Claim of financier to prevail over the state

Where under a hire-purchase agreement, the financier, i.e., the owner lets on hire a motor vehicle to the hirer, clause 4 of the agreement states that, on default by the hirer, the owner can seize, remove and retake possession of the vehicle and sue for all the instalments due and for damage for breach of the agreement and for all the costs of retaking of possession of the said vehicle and all costs occasioned by the hirers default. Clause 6 would show that, only upon the hirer paying the entire amounts due under the agreement, the said vehicle shall become the sole and absolute property of the hirer.

In regard to the registration of the vehicle shall become the sole and absolute property of the hirer. In regard to the registration of the vehicle, thought it is in hirers name, clause 8 of the agreement states that the owners-meaning the financing company agree to permit the hirer to have the registration of the vehicle in his name provided that the hirer shall transfer the registration in the name of the owners whenever required to do so by them and especially when the hirer commits breach of any of the conditions of the agreement.

In the light of these clauses in the agreement and in the event of the financier seizing the vehicle on default on the hirer in payment of the instalments, the claims of the financier would prevail over that of the State.

Where a person has got a prior secured right over the property, the States claim will not prevail. In the Income-tax Act, there is no substantive provision for superseding or overriding the claims or rights of a secured creditor. Schedule II mentioned in section 222 of the I.T. Act, 1961, which contains statutory rules in accordance with which the modes of recovery mentioned in that section have to be exercised, relates to procedure only and does not deal with substantive rights. [Sundaram Finance Ltd. v. RTO, (1979) 117 ITR 334 (Ker)].

Also Read Bail Application Format

Allowability of Depreciation of Hired Article

The Board has issued the following circular containing instructions regarding depreciation allowance on plant and machinery acquired under hire-purchase agreement.

 

Also Read Anticipatory Bail Application Format

Important Instructions to be followed in Case of Hire Purchase Agreement

(i) In every case of payment purporting to be for hire-purchase, production of the agreement under which the payment is made should be insisted on.

(ii) Where the effect of an agreement is that the ownership of the subject is at once transferred to the lessee( e.g. where the lessor obtains a right to sue for arrear of instalments but no right to recovery of the asset) the transaction should be regarded as one of purchase by instalments and no deduction in respect of hire should be made. Depreciation should be allowed to the lessee on the entire purchase price as per the agreement.

(iii) Where the terms of the agreement provide that the equipment shall eventually become the property of the hirer or confer on the hirer an option to purchase the equipment, the transaction should be regarded as one of hire-purchase. In such case the periodical payments made by the hirer should not tax purposes be regarded as made up of-

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(a) consideration for hire, to be allowed as a deduction in the assessment ; and

(b) payment on account of purchase, to be treated as capital outlay, depreciation being allowed to the lessee on the initial value(i.e., the amount for which the hired subject would have been sold for cash at the date of the agreement).

(viii) Registration.-Registration of a hire-purchase agreement is not compulsory.

(ix) Stamp duty.-The hire-purchase agreement requires a stamp of only Re. 1 like an ordinary agreement.

(x) Model Forms.

 

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Hire Purchase Agreement Format

                                                           AGREEMENT FOR HIRE OF ELECTRIC FAN

 

AN AGREEMENT made at………….this………….day of……………….20……between M/s. A B & Sons, a partnership carrying on the business of electrical appliances at…………(hereinafter called the “Owner”) of the ONE PART and X son of Y resident of……………….(hereinafter called the “Hirer”) of the OTHER PART.

WHEREBY IT IS AGREED AS FOLLOWS:

(1) The owner will let on hire to the hirer from the………….day of………….for a period of ………….months, an electric fan No………….of………….make………….Model

 

(2) The owner shall deliver the fan at his own expense at the house of the hirer at………….on the said………….day of………………and the owner or his servants shall instal the said fan in the room of the said house in accordance with the directions of the hirer.

 

(3) The hirer shall during the continuance of hiring pay to the owner at his address for the time being and without previous demand by way of rent for the hire of the said fan, the monthly sum of Rs………….payable in advance, the first payment to be made on the execution of these presents and each subsequent payment on the ………….day of every succeeding month.

(4) The hirer during the continuance of the hiring will not sell, assign, mortgage, pledge, underlet, lend or otherwise deal with the said fan but will keep the said fan in his own possession and will not remove the said fan from the place where the said fan is installed without the consent of the owner in writing and will protect the said fan against distress, execution or seizure and indemnify the owner against all losses, costs, charges, damages and expenses incurred by him by reason or in respect thereof.

 

(5) The hirer during the continuance of the hiring will at his own expense keep the said fan in good and substantial repair and condition (reasonable wear and tear excepted) and will permit the owner or his agents or servants at all reasonable times to have access to the said fan and to inspect the state and condition thereof.

 

(6) The hirer may determine the hiring at any time by …………… days notice in writing to the owner at his address for the time being and by returning the said fan to the owner and shall thereupon pay to the owner all money then payable to him under this agreement.

 

(7) If the hirer shall make default in punctual payment of any monthly rent or shall fail to observe or perform or shall commit any breach of any stipulation or condition binding upon him hereunder, then  the owner may without notice determine the hiring and may retake possession of the said fan and for that purpose, the owner, his servants or agents may enter upon any premises upon or in which the said fan may be believed to be installed.

(8) Any time, indulgence or relaxation granted by the owner shall not affect the strict rights of the owner under this agreement.

IN WITNESS WHEREOF, the parties have executed this agreement on the day and the year first hereinabove written.

 

WITNESSES

 

1          Signed and delivered by M/s. A B & Sons, the within named owner by its partners

 

2          Signed and delivered by X, the within named hirer