SECURITIES FOR SELLERS WHO SELL GOODS ON CREDIT

Summary:

Movable property sold on credit is a catch-22 for sellers. While the seller does not want the burden of keeping the goods in their custody for the duration of the credit agreement, they do not want to lose their real right over the property, namely ownership.

 

Article:

Take scenario one, in which a purchaser pays the purchase price of a good in a one lump sum. In this case, they are entitled to take delivery of the goods, and ownership will be transferred from the seller to the purchaser. Here, the rights, title and interest of the property is passed from the seller to the purchaser, which would be the ideal scenario for both parties.

But what if the purchaser cannot afford to pay the purchase price in one lump sum? In scenario two, the seller may enter into a credit agreement with the purchaser, where the goods are purchased on credit. This affords the purchaser the opportunity to pay off the purchase price in instalments until such time as the purchase price is paid in full. The complexity of this second scenario is in the delivery of the goods. Should the seller retain the goods pending the settlement of the deferred purchase price, he/she retains the right of ownership over the goods, along with the risks associated with retaining custody over the goods. The seller would have to insure the goods against theft, destruction, etc. and thereby burden themselves with added costs.

If the seller does not want to retain custody of the goods, due to the associated risks, and the purchaser desires delivery of the goods immediately, ownership of the goods will pass to the purchaser.

This scenario prompts a few questions. If the purchaser (debtor) defaults in his deferred payments of the purchase price and the goods are in the purchaser’s possession, what can the seller (creditor) do? Does the seller (creditor) have any rights over the goods? And what security does the seller (creditor) hold?

To afford the creditor some kind of security over the goods in anticipation of deferred payments, it is advised that the creditor retains ownership of the goods. For this to happen, a clause should be incorporated in the credit agreement, namely, a ‘retention of title’ or ‘reservation of ownership’ clause. This clause effectively suspends the transfer of ownership from the creditor to the debtor, while waiting for the purchase price to be settled. Nevertheless, while the creditor does not want to retain the use and enjoyment attached to the ownership rights of the goods, he/she does want to retain ownership as a form of security for payment of the instalments. The risk associated with the use and enjoyment of the goods passes to the debtor at the date of delivery of the goods, while the creditor retains the ownership rights as a form of security.

A typical clause in credit agreements will read as follows:

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

Until title to the goods passes, the applicant shall:

  • give the seller the right to enter the buyer’s premises to recover the goods;
  • oblige the buyer to store the goods separately from those belonging to the buyer or third parties;
  • oblige the buyer to mark the goods as belonging to the seller;
  • prohibit the buyer from fixing the goods to property without the seller’s written consent;
  • enable the seller to check that goods are appropriately marked and stored; and
  • specify the trigger events enabling the seller to enforce the Retention of Title clause.”

 

Reference List: 

Real Security Law (Juta)

 

 This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your adviser for specific and detailed advice. Errors and omissions excepted (E&OE).