Last updated February 13, 2024
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What is a Contract Purchase Agreement?
A Contract Purchase Agreement is used during vehicle sales where the buyer pays for the vehicle using monthly installments. The seller leases the vehicle to the buyer until the purchase is complete. Our template is ideal for situations not involving anyone in the business of selling or leasing vehicles (e.g., car dealerships).
Contract Purchase Agreements are also known as contract purchases.
How does a Contract Purchase Agreement work?
Over the term of a Contract Purchase Agreement, the buyer pays monthly installments and leases the vehicle from the owner. At the end of the term, the buyer can return the vehicle or complete the purchase by paying a final lump sum (i.e., a balloon payment).
The leasing company bases the balloon payment amount on the vehicle's:
- Estimated mileage at the end of the contract
- Wear and tear
- Make and model
- Current mileage
Buyer obligations
The buyer has several obligations after signing a Contract Purchase Agreement including:
- Insuring the vehicle and assuming all risks associated with the loss of and damage to the vehicle.
- Paying all fees required for the vehicle’s registration (e.g., licensing, testing, and any government-issued inspections).
- Keeping up to date on payments (e.g., down payments and regular monthly payments).
- Not transferring ownership of the vehicle to another party without the seller’s written consent.
- Not changing the vehicle or adding accessories to it without the seller’s permission.
- Not taking the vehicle out of the country where the contract was signed without the seller’s consent, except for short trips within continental Europe for 60 days or less.
- Following driving licence regulations while operating the vehicle.
- Not using the vehicle for illegal purposes.
Inspecting the vehicle
By signing the Contract Purchase Agreement, the buyer confirms that they have inspected the vehicle and that they accept it to be in good condition. This excludes defects not visible during inspection (i.e., manufacturer defects).
The seller can also check the vehicle at any reasonable time without prior notice to make sure that it is being maintained as per the contract terms.
Event of default
Under LawDepot's Contract Purchase Agreement, the buyer will default on their payments if:
- They fail to make a monthly payment on its due date.
- The buyer claims bankruptcy, receivership, or insolvency, or if any of the previous actions are initiated against the buyer by themselves.
- The buyer fails to pay the guaranteed future value, and they haven’t returned the vehicle at the end of the agreement.
- A bailiff or enforcement agent seizes the vehicle by the decree or order of a county court judgement (CCJ).
- The buyer has provided false personal or financial information.
- The vehicle is stolen or damaged beyond repair.
- The buyer passes away.
If the buyer defaults on the vehicle payments, the seller can cancel the contract and reclaim the vehicle. The seller can also pursue legal action against the buyer, potentially filing a lawsuit.
Excessive wear and tear
The buyer is responsible for ensuring regular maintenance and proper upkeep of the vehicle, and they will be charged for any signs of excessive wear and tear that are not covered by a warranty. Damages of this extent include:
- Missing equipment or accessories that came with the vehicle (e.g., wheel covers, jack, wheel wrench, and regular or spare tyres)
- Damage to the vehicle’s interior (e.g., the dashboard, seats, floor covering, upholstery, truck liner, and centre console)
- Mechanical damages that prevent the vehicle from functioning at the level of safety permitted by UK law (e.g., brakes, steering systems, and lights)
- Dented or damaged body panels, wings, or paint
- Cracked, damaged, or tinted glass
Purchasing the vehicle
The buyer may purchase the vehicle at any time during the contract or when the contract ends. If the buyer wants to purchase the vehicle before the contract ends, they must first pay:
- The monthly payment amount multiplied by the number of months left in the agreement
- The vehicle’s guaranteed future value at the end of the lease term, regardless of depreciation
- Any other fees, taxes, and expenses related to the vehicle
If the buyer wishes to purchase the vehicle after the contract ends, they must be able to pay the full guaranteed future value of the vehicle plus any other fees, taxes, and expenses related to the vehicle’s purchase.
Returning the vehicle
If the buyer has paid more than 50% of the monthly payments, they can return the vehicle whenever they want. They just need to cover repair costs for wear and tear and settle any remaining amounts, excluding monthly payments.
If the buyer hasn't paid at least half of the monthly payments, they can return the vehicle by paying half of the total monthly payments (excluding what they've already paid) and repair costs for wear and tear. This clears any remaining balances, except for monthly payments.
What is equity in a Contract Purchase Agreement?
Equity is the value of an item after liabilities and debts have been paid off. A Contract Purchase Agreement has two types of equity: positive and negative.
- Positive equity is if the car’s value is higher than the final balance of the payments.
- Negative equity is if the car’s value is less than the payments being made.
How long do Contract Purchase Agreements last?
LawDepot’sContract Purchase Agreement template bases the amount of time the contract lasts on your unique situation, so it differs for each person. However, Contract Purchase Agreements created through car dealerships and leasing agencies typically take 2 to 5 years to complete.
You must include the following details for a Contract Purchase Agreement to be valid in the United Kingdom:
- Buyer and seller details: State if the buyer or seller is an individual or a company, as well as their name and address.
- Vehicle details: Specify if the vehicle is new or used, along with its colour, make, model, and identification number.
- Financing information: Provide the contract term length, full retail value, guaranteed future value, and security deposit information.
- Costs and fees: List the details for pre-authorized payments and penalty fees or other costs associated with late payments.
- Warranties: State the number of years left on the manufacturer’s warranty and whether an extended warranty for repairs will be provided.
- Insurance: Vehicle insurance is a legal requirement for drivers in the UK.
- Additional clauses: Our template allows you to add extra terms to your Contract Purchase Agreement.
- Signing details: Specify the contract’s signing date.
What is the difference between a Contract Purchase Agreement and a hire purchase agreement?
In a hire purchase agreement, you put down an initial deposit, usually 10 percent or higher, and then pay off the balance in monthly increments. Unlike in a Contract Purchase Agreement, the vehicle's residual value is not considered. Instead, hire purchase agreements focus on the car’s:
- Retail price
- Deposit size
- Contract length
In a Contract Purchase Agreement the buyer is paying off the vehicle's depreciation value, not the entire value. Meanwhile, in a hire purchase agreement, the buyer is working towards paying off the entire value of the vehicle in order to purchase it at the end of the term.
Can I make changes to an existing Contract Purchase Agreement?
Yes, you can usually adapt or change the terms of a Contract Purchase Agreement. To do so, the buyer and the seller must agree to the changes. Both parties can sign a Contract Addendum to confirm that they have reached an agreement.
The amended contract must include both party's signatures and the changes' dates.
Can I cancel a Contract Purchase Agreement?
Yes, you can cancel a Contract Purchase Agreement. It may be beneficial to cancel a total finance agreement if:
- The car’s value outweighs the final balance (i.e., it has positive equity)
- You no longer need the car
- You can afford to downgrade your car or go without one completely
You should potentially avoid cancelling a Contract Purchase Agreement if:
- The car has negative equity, and you want to sell it
- You can't afford to pay at least 50 percent of the remaining balance in cash of the total finance payments (e.g., if the buyer has paid £10, 000 and the total finance payment is £30, 000, then the buyer will have to pay an additional £5, 000 to reach 50 percent)
You can cancel a Contract Purchase Agreement in two ways: voluntary termination or through a settlement (early repayment).
Voluntary termination
You can cancel the agreement with voluntary termination and return the car if you have made at least half of the payments.
Early repayment or settlement
Requesting a settlement is another option if you want to cancel the agreement and you have the funds to pay off the full remaining balance of the agreement. A settlement can be more cost-effective than monthly payments under a Contract Purchase Agreement as you will no longer have to pay interest.