Reservation of Ownership - Part One

Picture this – you walk into a car show room and see the most exquisite convertible you have ever seen.

You sit in it, smell the new leather, see all the fancy trimmings and all you can do is beg the car dealership to let you take it for a test drive. After some begging and pleading (and perhaps a quiver of the bottom lip), a reluctant agreement is reached and off you go.

She drives like a dream, just like you knew she would. She handles corners like she was made for them and with the roof down you can feel the wind in your hair. It almost smells like freedom.

It’s a no brainer. This convertible has got to be yours.

Until you hear the purchase price that is.

Not as appealing as the drive, the handling of corners or the wind in your hair. Affordability and freedom seemingly drifting further and further apart.

But then the car dealer looks at you with a nod, a wink, and a smile – he has the perfect solution for you. 

An instalment sale agreement. Things are about to get interesting….

And you may be wondering – at this point – is this where the reservation of ownership comes in? Well, yes. But before we jump right into it, we first need to understand in what situation such a clause may be found…

Let’s start things off but discussing what an instalment sale agreement is..

An instalment sale agreement is exactly what is sounds like –

• a person (the borrower or purchaser in this scenario) purchases
• an asset (in this case a vehicle)
• for a principle debt (that is the amount of the purchases price of the vehicle)
• from the seller or credit provider (the car dealership in this scenario) and
• the principal debt is repaid by means of regular instalments over an agreed time period (the time period needs to be defined – you cannot pay a loan over an indefinite time period).

Just so we are all on the same page, a principle debt is the total amount that a credit provider agrees to lend a borrower and is made up of various amounts, regulated by the National Credit Act No 34 of 2005  (NCA). These amounts include:

1. The loan amount or purchase price, being the total amount paid to a dealer for the asset, less any cash deposit or vehicle trade-in;
2. An initiation fee, unless you pay this to the credit provider upfront;
3. Additional fees or charges as set out in Section 102 of the NCA, and
4. Premiums for any credit insurance such as credit life or asset insurance required by the credit provider.
   

Also, good to know! An instalment sale agreement is, in terms of Section 8(3) of the NCA, a credit agreement –

“(3) An agreement, irrespective of its form but not including an agreement contemplated in subsection (2) or section 4(6)(6), constitutes a credit facility if, in terms of that agreement- 

(a) a credit provider undertakes- 

(i) to supply goods or services or to pay an amount or amounts, as determined by the consumer from time to time, to the consumer or on behalf of, or at the direction of, the consumer; and 

(ii) either to- (aa) defer the consumer’s obligation to pay any part of the cost of goods or services, or to repay to the credit provider any part of an amount contemplated in subparagraph (i); or (bb) bill the consumer periodically for any part of the cost of goods or services, or any part of an amount, contemplated in subparagraph (i); and

(b) any charge, fee or interest is payable to the credit provider in respect of- 

(i) any amount deferred as contemplated in paragraph (a)(ii)(aa); or 

(ii) any amount billed as contemplated in paragraph (a)(ii)(bb) and not paid within the time provided in the agreement.”

Now the benefits of this instalment sale agreement for you – the purchaser – is that you are able to purchase your convertible dream car without having to pay one (large) lump sum. You are able to pay it off in agreed upon instalments over a period of time and until such time as the purchase price has been paid in full. 

But there is a slight complexity here -> When does ownership pass? 

In the normal course of events, the car dealership will retain ownership of the vehicle until such time as the debt has been paid in full. But the issue with this is – do they want to retain all the associated risks with the possession or custody of the vehicle? The answer of course is a resounding – NO. Who in their right mind would want the extra effort? Because you see, if the car dealership retains physical possession of the car, they need to insure it against theft or destruction. And that simply means that the car dealership will only burden itself with additional costs it doesn’t need to incur.

So, the possession of the vehicle is given over to you – the purchaser - for your use and enjoyment. But with this use and enjoyment (which passes to you on the date of delivery of the vehicle), the burden to “look after” the vehicle passes to you. You will now be responsible for insuring the vehicle against theft or damage. Thereby relieving the car dealership of this burden.

A type of quid pro quo if you will.

But we haven’t really answered the question yet, have we? -> OWNERSHIP? As has been alluded to above, ownership of the vehicle will only pass to you - the purchaser - when the debt has been paid in full.

The real right of ownership of the vehicle remains vested in the car dealership. With the car dealership only having legal ownership and you -as the purchaser_ having possession as well as use and enjoyment, how does the car dealership protect itself against a default in payment of the instalment amounts? What if you just stop paying? What happens to the vehicle?

To protect itself from any deferring of payments the car dealership (or any credit provider) will retain ownership as a form of security for payment of the instalments.

What does this mean? 

Well, if the purchaser of the vehicle defaults in the instalment (or defers) payments of the purchase price of the vehicle, the seller will exercise their rights of ownership over the vehicle. This will, most likely (and again in the ordinary course of business) result in the institution of legal proceedings in order to recover any outstanding amounts. This could also result (eventually) in the repossession of the vehicle.

But hold on just a second…. We are getting ahead of ourselves a little bit here. This article is not about debt collection.

Finally - The reservation of ownership clause

The next logical question following the previous section is this – How does the car dealership retain ownership as security over the vehicle? 

• As in, how do they actually go about doing this?

To retain ownership over the vehicle a clause should be (and usually is) included in the instalment sale or credit agreement termed a ‘retention of title’ or ‘reservation of ownership’ clause.

The purpose of this clause is to suspend the transfer of ownership from the car dealership (as creditor) to you - as purchaser - (or debtor), while waiting for the purchase price to be settled in full.

A typical reservation of ownership clause could read as follows:

“Until such time as the Applicant has paid the purchase price in full in respect of the purchase of the vehicle, the ownership in and to the vehicle shall remain vested in the Seller. The Seller shall, in its sole discretion, without notice to the Applicant, be entitled to take possession of the vehicle which has not been paid for and in respect of which payment is overdue, in which event, irrespective of whether title to the vehicle remains vested in the Seller, risk in the goods shall pass to the Applicant upon delivery.”

Note! “Vehicle” can be replaced with a generic “goods” where applicable. A basic reservation of ownership clause will state that legal ownership to the vehicle will not pass from the seller to the purchaser until the purchaser has paid for the vehicle in full. A right for the seller to enter the purchaser's premises to repossess the vehicle should be included (see below). This is to ensure that the seller is not trespassing on the purchaser’s private property if required to do so.

Other obligations (that are appropriate for the asset in question) can be included to ensure that repossession, if necessary, is made as easy as possible - along the lines of:

Until title to the vehicle has passed, the Applicant shall:

1. give the Seller the right to enter the Applicant's premises to recover the vehicle;
2. store the vehicle separately from goods belonging to third parties;
3. enable the Seller to check that goods are appropriately insured and stored; and
4. specify the trigger events enabling the Seller to enforce the Reservation of Ownership clause.

Further specifics in relation to the reservation of ownership clause can and should be included according to the nature of the goods being sold.

Should you require assistance with an instalment sale agreement and more specifically with a reservation of ownership clause, please get in touch with one of our suitably qualified attorneys – we are more than happy to assist and support you as you navigate what can be a complicated, costly and time consuming process. 

To close this article off , we believe a further question does arise – what if it’s not the purchaser (or creditor) that defers payments? What if the problem arising out of this instalment sale or credit agreement is due to a fault on the part of the seller (or creditor)? An interesting topic to be sure – check out our next article where we will be discussing this in a little more depth. 

In the meantime, if you have any questions on the information we have set out above or have a personal issue which you want to discuss with a suitably qualified legal professional, please don’t hesitate to contact us at NVDB Attorneys. 

We are a law firm that considers honesty to be core to our business. We are a law firm that will provide you with clear advice and smart strategies - always keeping your best interests at heart!