Hire Purchase Agreement is considered a valid contract under the Iranian regulations in which the parties enter into the agreement with the intention of retaining the subject of agreement in the possession of owner until the end of the leasing period and transferring the ownership to the lessee after paying the last installment. The parties to the agreement could be any person including a natural person, legal entity, private or public. It should be noted that since the Cost Price of the commodity is received from the other party in the format of installments, the price of the commodity shall increase according to the payment period and the owner can increase the cost price as required. Similarly, it is necessary to prevent the installment period from being too long as it might be the case for the subject of an agreement to be amortized, in which case through non-payment, the lessee can terminate the agreement and restore the subject to the owner.
As regards the Iranian legal system, the following formats of hire purchase could be concluded:
1) A lease agreement can be concluded with a clause providing that if the lessee wants the subject of the leasing agreement, he/she can declare acceptance and become the owner after the lease period. The most important problem with this type of hire purchase is that the owner cannot play a role in determining the ownership of the subject of the agreement and it is solely the lessee who can determine the final owner of the subject.
2) A lease agreement can be concluded with a clause providing that after the lease period and payment of the last installment, the lessee shall become the owner of the subject. In other words, at the time of concluding the agreement, the parties have declared their intention regarding the transfer of the ownership after payment of the last installment and if the requirements are met, the transfer of ownership is final and does not require any further agreement.
It is more reasonable to conclude a lease on the condition that it is customary in similar contracts because, if all the conditions are met by the lessee, the ownership is transferred to the lessee without the need for declaring the intention of accepting the transfer. This approach is also more consistent with the owner’s objectives and interests.
The Legal Basis for Hire Purchase Agreement:
As regards the Iranian legal system, this agreement is not among the Specific Agreements mentioned in the Civil Code of Iran, however, according to Article 10 of the Civil Code, the agreement between parties is valid if it is not contrary to the law. Therefore, this agreement is valid and the legal relationship between the parties is a lease, according to which at the end of the lease period and after payment of installments, the subject of the agreement is transferred to the lessee according to the provisions of Article 236 of the Civil Code. Furthermore, due to the possession right invested in the lessee, if the owner withholds from the final transfer, according to Article 237 of the Civil Code, the lessee can require the owner to transfer the property through the legal authorities. This agreement is considered to be a Binding, Possessory and Reciprocal agreement and neither of the parties can terminate the agreement except in the cases provided by the agreement or law.
As for the conclusion of a hire purchase agreement, it is recommended to include the following terms:
1. Ownership of subject of the lease: the subject of lease is in the possession of the owner until the payment of last installment and the lessee has no ownership rights in this period. In case of termination at any time during the contract, all costs paid by the lessee are treated as rental fees and the lessee is obliged to return the subject of the lease in the format he/she has received
2. Guarantees: in order to ensure the good performance of the lessee, some guarantees shall be received.
A: a bank guarantee for retention of the subject until the end of the contract period.
or ensure the payment of all installments.
B: if the subjects of the lease are extremely high, it is recommended to use the lessee’s place of business as the guarantee. In this case, if the lessee becomes insolvent, the owner enjoys priority in comparison with other debtors in regard to the collection of its damages from the guarantee.
3. Delivery of the Subject of Lease: in order to obviate any future claims of the lessee regarding the defects, the subject of the lease must be verified before delivery and the relevant certificate must be acquired from the lessee.
4. Retention and Repairing the Subjects of Lease: all responsibilities regarding retention and repairing the subjects of lease lie with the lessee and he/she is obliged to take all safety and technical measures in order to retain the devices and repair them if necessary. Furthermore, all other generals, partial, direct and indirect payments which are made for better use of the subject of the lease or any other purpose lie with the lessee and in this regard, the lessee has no rights to refer to the owner.
5. Insuring the Subject of Lease: in case it is necessary to use the insurance regarding the subjects of the lease, this task shall lie with the lessee
6. Visiting the Subject of Lease: It must be noted the owner can, at any time during the contract period, visit the subject of the lease.
7. Termination of the Contract: It is recommended that termination of the contract be anticipated, for example if the lessee cannot pay the installments on time and two Consecutive installments or three Periodic installments are not paid on time, the owner can collect its debts and damages from the guarantees, terminate the contract and restore the subject of the lease.
8. Transfer of Subject of Lease: It is recommended that to predict the clause in which the lessee does not have the right to transfer (through Sale, Compromise and Representation, etc.) the subject of the lease until the end of the contract period.
9. Settlement of disputes arising out of the contract : in order to prevent the prolongation of judicial procedures and the resulting damages to parties, it is recommended to refer disputes of any kind to the arbitration
10. Payment in Advance: if at the time of concluding the contract, a price is fixed as a payment in advance, and a period is set for its payment, the owner is entitled to a right of lien and can withhold delivery of the subject of lease until the payment in advance is made by the lessee.
11. Force Majeure: the lessee is obligated to pay the installments on the predetermined times. Any excuses and claims regarding sanction, change in the raw materials, etc. shall be not acceptable.
Bayan Emrooz Law Firm renders services to foreign and Iranian natural and legal persons in the field of Contract law, including consulting and registration of a company, branch and representative office. Having an experienced and specialized legal staff, Bayan Emrooz is ready to provide the needed legal services in respect to investment and JVs, sale and purchase in accordance with Incoterms, exclusive and non-exclusive agency, distributorship, technology transfer, license, franchise, turn-key, buy-back, finance, consultancy services, service contracts, EPC, transportation and logistics, insurance, MOUs, LOIs and etc. in Iran.
Bayan Emrooz Law Firm was founded in 2008 under the registration No. 23211 in Tehran, and renders legal consultation and attorneyship services to foreign or domestic legal and natural persons. Our approach and main purpose is to expand the culture of utilizing legal consultation in civil and commercial matters in order to prevent high personal or social costs spent on resolution of disputes before judicial and non judicial authorities.