CIVIL

What is hire-purchase agreement

A hire-purchase agreement, being an agreement to hire coupled with an option (not an obligation) to purchase, developed in the middle of the nineteenth century as a means of financing the retail acquisition of furniture, sewing machines and musical instruments.It is said that this rental-purchase method covered the acquisition of pianos in the 1840’s and Singer sewing machines in the 1860’s.Two English cases of the 1890’s consolidated the development of hire-purchase as a finance product. The prevalence of hire-purchase increased in the early decades of this century. In the depression years of the 1930’s however, abuse of the agreements became more prolific.

A feature of the hire-purchase transaction has been that the financier retains ownership of the goods until the completion of the hire-purchase agreement and, being the owner of the goods, becomes liable for defects of the goods. Sweeping exemption clauses were therefore included in the agreements giving no recourse to the hirer if the goods were defective. An additional factor which preceded statutory regulation of hire-purchase transactions was the snatch-back practice. This involved the seizure of goods owned by the financier for the hirer’s default without regard to the value of the goods, the payments already made by the hirer or matters of compensation following repossession. Consequently, remedial legislation was introduced in both England and Australia.

The popularity of hire-purchase, particularly in Australia, had began to decline in the 1960’s as a result of the operation of stamp duties law and the imposition of a two per cent stamp duty on hire-purchase agreements.This decline led directly to the development of alternative transactions. One alternative was the unregistrable chattel mortgage. This type of transaction comprises a contract for the sale of goods between a dealer and customer with finance provided under contract by a third party credit provider.The chattel mortgage did not attract stamp duty.

A further substitute for the hire-purchase transactions was a goods lease, known as the `residual value lease’ or the `implied purchase lease’ or the `nods and winks lease’. The use of the goods lease increased in the commercial field for the acquisition of vehicles, plant and equipment. The advantages of the goods lease in regard to income tax is that the lease payments may be claimed as a tax deduction when the goods leased are used for earning assessable income.


Source: Parliament of Victoria-Review of the Hire-Purchase Act 1959 [12/8/99]

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