An introduction into the sales contract with a “buy-back” option

It’s the one thing we do every single day, unconsciously, unceasingly, and yet, it’s still not engraved in the minds of the people that have not studied its mysteries. The contour that we shaped describes the well-known sales contract which encapsulates only a part of the legal mechanism that it’s really happening. While we are going on with our daily endeavors, such as grocery shopping, walks accompanied by a warm coffee, all of them imply some for of participation in a sales contract that gave us ownership of our desired goods.

It is the recurring usage that compels us, at least morally, to better understand the meaning of sales contract, what are it’s implications, when has it been concluded, so on and so forth.

The emphasis of the present article will be touching only a shade from the vivid palette of colors which embodies: the sales contract, focusing on the problematic of the “buy- back” option.

Having anything but an uneventful history, this legal institution has found itself at the opposite end of many legislative reforms, considering it’s use in usury, being a legal façade use by loan sharks to impose excessively high interest rates. For the sake of diversity, we will be referring to the sales contract with a “buy-back” clause as repurchase agreement as well.

How does the repurchase agreement work?

Probably redundant, it’s worth to remind that we are still in the presence of a sales contract, which happens to have a unique clause that states the following: if the contract concludes, the seller, for a said period of time, can request to buy back the asset which he previously sold, without needing the consent of the buyer.

If we put ourselves in the position of the buyer, we might ask the question: “why would we want to use such a variation of contract”.

The most common use of a repurchase agreement stands in using it a way to loan a sum of money without needing to lodge a security such as a mortgage while avoiding the disadvantages of foreclosure proceedings which can be considerably time-consuming and come with it’s on share of inconveniences.

Even if at first glance it is a bit challenging to see how such a mechanism of loaning works, appearances can be deceitful for it is very simple once we sort out the basics.

Let’s say X has an urgent need for a sum of money to be able to pay his debt that has accumulated over time, Y has enough money to spare and he is willing to borrow some to X, but he wants to be sure that he will be getting his money back in case X is not able to pay back his loan. Andrew also doesn’t want to go through the procedures of sorting out a mortgage. The two of them come up with a plan of action: X has a car and he will sell it to Y for a price that is usually lower than the market price and X has the option to buy back the car within a period of 4 years after the conclusion of the contract, but for a slightly bigger price than the one that he sold it for(adding the legal interest rate for each year that has passed until he exercised his option to buy back.

This way X will now have the sum of money that he needed in order to pay his loans and in case he will save enough money to buy back his car, Y on the other hand will either end up with a car that he bought for a smaller price than the market average or with a profit consisting of the interest that was paid for the loan alongside the expenses regarding the sales contract that were covered by him.

The limitations of the repurchase agreement

As it is mentioned in the civil code, the upper limit of the duration in which the repurchase can occur is 5 years, for any period that is greater, it will be legally capped at 5 years. This is reasoned based on limiting the duration of incertitude, as a buyer it is not a pleasant experience knowing that your asset can be repurchased at any time without being able to have any say about it. On the other hand, any period smaller than 5 years is perfectly valid.

Considering it’s history, we must remember that in the past it has been used by loan sharks to mask usuries and give the appearance of perfectly legal contracts, we are talking about interest rated that can well exceed 50% annual interest, without entering in the specifics of this operation, we must note the fact that the buyers in the contract can amass considerably large profits with this speculative legal manoeuvres.

To stop this practice, the law states that any difference of price between the purchase and repurchase that exceeds the legal interest rate will make the repurchase price be equal with the purchase price. Concluding, it is not only impossible to charge interest greater than the legal limit, but trying to do so sanctioned so severely that the person who tries to do so will receive NO interest in the end. Considering this, we must be very careful when we are building the repurchasing agreement.

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