Drafting a hire-purchase agreement: what belongs in it

A hire-purchase agreement must be drawn up in writing, stating a clear purchase price, the number of installments, and the amount of each installment, as this written form is legally required (Article 7A:1576i of the Dutch Civil Code). Hire-purchase is an installment purchase where the buyer only becomes the owner after the final installment (Article 7A:1576h of the Dutch Civil Code). Because the law protects the buyer and consumer credit regulations apply to consumers, the precise content of the deed is important. An incomplete agreement does not qualify as a hire-purchase.

The short answer

1. Record the item: exactly which object, with serial number or specification.
2. Note the purchase price: total price, any credit fee and VAT.
3. Determine the installments: number, amount, and due dates (required in the deed).
4. Arrange the retention of title: ownership only transfers after the final installment.
5. Include an absence and take-back arrangement within the statutory protection.

Drafting a hire-purchase agreement: the core

The deed stands or falls on three pieces of information required by law: the purchase price, the number of installments, and the amount of the installments (Article 7A:1576i of the Dutch Civil Code). If any of these elements are missing, or if the agreement is not in writing, the arrangement does not qualify as a hire-purchase and the retention of title does not function as intended (Article 7A:1576j of the Dutch Civil Code). Therefore, start with a conclusive description of the item and a clear breakdown of the price.

In addition to the basic purchase price, also state any credit fee or interest, so that the buyer knows the total amount paid. Furthermore, for a consumer, there are statutory limits on the credit fee.

Retention of title and risk

The retention of title is the core of hire purchase: the seller remains the owner until the final installment has been paid (Article 7A:1576h of the Dutch Civil Code). Stipulate that ownership transfers automatically as soon as everything has been paid. Additionally, regulate who bears the risk during the term. Often, the buyer bears the risk of damage or loss, while the item is legally still the property of the seller, and it is agreed that the buyer will insure the item.

Also include what the buyer may and may not do with the item as long as he is not yet the owner, for example, that he may not resell or encumber the item.

Default, repossession and the protection of the buyer

The law protects the buyer against premature repossession. A seller cannot simply repossess the property as soon as the buyer is late with a single payment. Special rules apply to dissolution and repossession, including judicial intervention and set-off of installments already paid (Article 7A:1576t et seq. of the Dutch Civil Code). A default clause in the deed may not undermine this protection; clauses that do so are invalid.

Therefore, draft the default procedure within the legal framework: a formal notice, a reasonable period for rectification, and only then take further steps. This way, you keep the agreement enforceable and prevent a clause from failing.

A brief real-life case: a supplier sells a forklift to a wholesaler on a hire-purchase basis in 30 installments. The agreement specifies the purchase price, the 30 installments with due dates, the retention of title clause, the obligation for the buyer to insure the forklift, and a default clause with a formal notice. When the buyer missed two installments, the arrangement proved enforceable because it respected statutory protection.

Common mistakes

• No written deed or missing price or installments, meaning it is not a hire purchase.
• Unclear retention of title, so that the seller's security is shaky.
• Overly strict take-back policy that violates the legal protection of the buyer.
• Forgetting consumer rules, while additional requirements apply to a consumer-buyer.
• Risk and insurance not arranged for the period prior to the transfer of ownership.

You can find more background in what is a hire-purchase agreement and having a hire-purchase agreement drafted. Need a basic overview? Check out the hire-purchase agreementpage.

Honest recommendation

For a small amount, short installment terms, and a business counterparty, you can perfectly well draft a hire-purchase agreement yourself, as long as you adhere to the written form and the mandatory information. However, do consult a lawyer for larger amounts, when the buyer is a consumer, or when the buy-back clause is important. The written form requirement and buyer protection are precisely the areas where a mistake undermines the entire arrangement, and you want to have these in place beforehand.

Frequently Asked Questions