Hire Agreements: It Pays to Read the Small Print
Naturally, the growth of a business, or a plan to grow a business, usually relies upon having additional resources to enable such expansion. These resources can come in all sorts of shapes and sizes including, for instance, large-scale office equipment, vehicles, machinery or plant. However, not all businesses will have the available finance to fund these resources, or at least up front, and so will typically explore hire agreements.
Aside from a straightforward loan, these hire agreements can take many forms but are typically either a hire purchase or conditional sale agreement. That is not to say, however, that hire agreements are straightforward – far from it. Rather, the contractual rights and obligations of a borrower to a lender (and vice-versa) can often be complex and more burdensome than initially thought – resulting in more opportunity for either party being in breach of the agreement.
It follows that commercial borrowing certainly comes with (often unforeseen) risk and has potential to prove catastrophic to a business venture. So, what happens when it doesn’t go to plan, and the borrower can no longer afford the hire agreement? Or, if either the borrower or lender is in breach of their respective contractual obligations? What happens to the goods secured under the agreement? What about any personal guarantee a director may have given to the lender to secure the hire agreement?
Understanding the small print
Below, is a non-exhaustive list of typical provisions found in hire agreements that, in our experience, usually cause a stir and dispute: –
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Maintenance obligations:
Naturally, a lender agreeing to hire goods elsewhere will want to protect the value and condition of the goods throughout the rental period, particularly on the possibility that the borrower either does not take up on its option to purchase the goods comes the end of the rental period, or should the lender look to recover the goods as a result of the borrower’s breach of the agreement.
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Restrictions of use:
For similar reasons, the lender will likely want to impose restrictions upon the borrower on its use of the hired goods. For instance, lenders will often restrict the use of its vehicles by imposing a cap on milage or hours in which they can be used. It is therefore imperative that the borrower is aware of any such restrictions to ensure it coincides with its intended use of the goods.
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Option to purchase:
A fundamental provision within any hire agreement is whether the borrower has any option to purchase and own the goods come the end of the hire period, or indeed any time point throughout the hire period. Otherwise, the borrower may need to be mindful of its accounting if the goods are hired by way of an operating lease.
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Liabilities of the borrower (and any personal guarantor) following its breach of the agreement:
A well-drafted hire agreement should outline how a borrower will be in contractual breach and, if so, to what extent it would be liable to the lender. The borrower’s liability to the lender may be far-reaching and more grave than initially thought, especially if not only they are to return the goods to the lender forthwith (irrespective of any continued necessity of the goods) but also pay the lender significant amount of damages, costs and other default fees.
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Liabilities of the lender following its breach of the agreement:
As a hire agreement is often drafted by the lender and, in turn, more favourable to it, the liability of a lender to the borrower in the event of its breach of the agreement is carefully drafted and limiting. A borrower should therefore be mindful of any such limitations of the lender’s liability even in cases where the lender is in gross breach of its own agreement.
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Dispute resolution:
It would be foolish for either the lender or borrower to be adamant that there will not be any issues or disputes throughout the rental period. They should therefore be aware of any dispute resolution provisions under the hire agreement before hastily escalating matters not in conjunction with those terms and, in turn, be in contractual breach themselves. It is not uncommon to see parties contractually obligated to go through various hoops and hurdles and engage in alternative dispute resolution (ADR) before issuing any claim with the Courts.
How can Ellis Jones help with disputes arising out of a hire agreement?
When a dispute arises between a lender and borrower under a hire agreement, or if one is anticipated and brewing, it pays to seek legal advice as early as practicable.
If you require advice or support relating to a hire agreement dispute, please contact our Dispute Resolution team on 01202 525333 or by emailing resolution@ellisjones.co.uk.
How can we help?
When you submit this form an email will be sent to the relevant department who will contact you within 48 hours. If you require urgent advice please call 01202 525333.
