Conditional Sales Agreement: Definition and What's in Contract

What Is a Conditional Sales Agreement?

A conditional sales agreement is a financing arrangement where a buyer takes possession of an asset, but its title and right of repossession remain with the seller until the purchase price is paid in full.

The purchaser can take possession of the property as soon as the agreement is in force, but does not own the property until they have fully paid for it, which is usually done in installments. If the business defaults on its payments, the seller will repossess the item.

Conditional sales agreements are often put in place during the financing of machinery and equipment, as well as various forms of real estate.

Understanding Conditional Sales Agreements

A conditional sales agreement is a contract that involves the sale of goods. Also known as a conditional sales contract, the seller allows the purchaser to take delivery of the items outlined in the contract and pay for them later. Rightful ownership of the property belongs to the seller until the full price is paid by the buyer.

Many conditional sales contracts involve the sale of tangible, physical assets—sometimes in large quantities. These include vehicles, real estate, machinery, office equipment, tools, and fixtures.

A buyer and seller come together and begin the contract with a verbal agreement. Once they both concur on the terms, the buyer draws up a formal, written contract that outlines the terms including deposit, delivery, payments, and conditions. The contract should also include what happens if the buyer defaults and when payment in full is expected.

Conditional Sales Agreement Contracts

Strong contracts lay out details of the nature of the deal between the buyer and seller, and are ready for review for both parties to sign once they are able to come to a verbal agreement.

Contracts should be as specific as possible and outline the following criteria:

• Property type: The nature of the assets in question, their condition, as well as the quantity being transferred to the buyer.
• Payment: The amount of the deposit or down payment required by the buyer to secure the property from the seller. This section should also include when the final payment is due.
• Interest: Because payment is being made in installments, the buyer will also outline the amount of interest it intends to collect during the length of the contract.
• Delivery: How and when delivery of the property will take place.
• Title transfer: The date by which the title should transfer to the buyer as long as the conditions of the contract are fully met.
• Default: The details of when the buyer is in default of their obligation.
• Repossession: The contract should also describe the procedure for the seller to recover any property. This typically includes a clause giving the seller the right to enter the premises to take possession of equipment and other personal property.

Benefits of Conditional Sales Agreements

Acquiring property through a conditional sales agreement may allow a business to deduct the interest expense on its tax return. A conditional sales agreement may not require a down payment and may also have a flexible repayment schedule.

Other benefits to a buyer include giving the buyer access to an asset before full payment, which can create financial leverage for a business. Buyers with weaker credit histories may also tap otherwise unavailable credit by using seller-provided financing, which is particularly effective for newer business entities.

A conditional sales agreement also protects the seller if the buyer defaults on required payments. Since the title does not transfer to the buyer until the completion of the conditions, the seller remains the legal owner throughout the duration of the contract. This makes it easier for the seller to legally repossess or reclaim possession, because it does not need to use expensive foreclosure proceedings against the buyer after a title has been transferred prematurely.

Examples of Conditional Sales Agreements

As mentioned above, conditional sales contracts are typically used by businesses to finance the purchase of machinery, office supplies, and furniture.

Conditional sales agreements are typical in real estate because of the stages involved in mortgage financing—from pre-approval, appraisal, to the final loan. In these contracts, the buyer can generally take possession of and use the property after both parties have signed and agreed on a closing date. The seller, however, generally keeps the deed in their name until financing has come through and the full purchase price is paid.

The same applies to automobile purchase contracts. In some states, buyers can drive the car off the lot by signing a conditional sales contract. These contracts are typically signed when financing is not finalized. The vehicle's title and registration, however, remain in the name of the dealer, who has a right to take back the vehicle if conditions aren't met. This means the seller is still working to guarantee the financial terms of the deal, or the seller must come up with their own to complete the purchase.

Many people who rent to own items such as electronics and furniture are also involved in conditional sales agreements. The consumer may pay a deposit to the retailer for the item—say a television set—and agree to a certain number of payments under the deal. Until the set is paid off in full, the retailer has the ability to take it back if the customer defaults on payments.