Here we look at what happens to deposits paid by customers where finance documents are not signed and also when they are signed.
Finance Documents not signed.
When a vehicle is sold subject to finance, you are not entering into any contract with the customer directly. You are in effect acting as agent for the finance provider.
The contractual relationship will be created between the customer and the finance provider once the finance documentation is signed. That is why if a customer with finance funding wants to reject a vehicle, they have to reject to their finance provider and not you.
So even if a deposit is taken by you, this will not create a contract between you and the customer. If the finance documents are never signed (e.g. customer changes their mind or declined finance) no contract will exist between the customer and finance provider.
If no contract exists, you cannot retain the deposit as you have no right to do so as you have no contract with the customer.
Furthermore, Section 70 of the Consumer Credit Act 1974 states that any finance agreement which is contemplated or withdrawn from entitles the debtor (customer) to be repaid any sum paid under or in contemplation of that agreement.
MILS had a case where a deposit was taken by debit card of £500 for purchase subject to finance. Customer was told deposit was non refundable. Customer was subsequently declined finance. Dealer would not return deposit claiming the customer knew it was non-refundable. Customer sued and won. Got back deposit, interest on it and all court fees paid out. Ended up costing dealer £800.
Finance Documents signed.
A Consumer Credit Directive from Europe dated August 2010 and implemented in England and Wales on 1st February 2011) provides additional right to customer to withdraw from any Hire Purchase agreement once it is signed.
It states that a consumer can withdraw from a hire purchase agreement for no reason at all by giving written or oral notice within 14 days of signing up to it. This means any payment made to you by the finance provider will have to be repaid to them. However, the customer is still bound to proceed with their purchase by some other financial means.
If the customer does not proceed, you can sue them for your losses incurred as a result of their breach. However, you can still not retain their deposit due to section 70 of the Consumer Credit Act 1974 mentioned above. You have an obligation to mitigate your loss so you would need to re sale the vehicle at the best market price and then sue for any losses following from the same. You have to prove and justify the losses with evidence.
MILS had a case where the customer gave 14 days notice of cancellation of his HP agreement. He did not go through with the purchase by other means. The client re sold the vehicle and sued the customer for storage charges, maintenance charges, advertising fees and loss of profit and obtained Judgment on all sums claimed.
As always, this advice is general in nature and will need to be tailored to any one particular situation. As an RMI member you have access to the RMI Legal advice line, as well as a number of industry experts for your assistance. Should you find yourself in the situations above, contact us at any stage for advice and assistance as appropriate.
Motor Industry Legal Services (MILS Solicitors) provides fully comprehensive legal advice and representation to UK motor retailers for one annual fee. It is the only law firm in the UK which specialises in motor law and motor trade law. MILS currently advises over 1,000 individual businesses within the sector as well as the Retail Motor Industry Federation (RMI) and its members.