What Is a Conditional Sales Agreement?

A conditional sales agreement is a contract between a buyer and seller in which possession is transferred immediately but ownership occurs only after full payment. These agreements are often used for property sales or the selling of large machinery and vehicles that may require many months or years to pay off. The seller typically establishes the amount of time that the buyer has to pay the entire amount due for a conditional sales agreement, often in monthly installments. While payments are being made, the buyer is able to use the item that is being sold, but does not have complete ownership over it until the agreement is complete.

The primary distinction within a conditional sales agreement is between possession of an item and ownership over that item. Possession means that a buyer is able to use and occupy a certain good, but does not have a title or other document of ownership for it. For example, property may be sold to a buyer under a conditional sales agreement in which full payment for the property is spread out over several years. During the time that these payments are being made, the buyer is able to take possession of the property, building and living or doing business on it as appropriate.

In this example, the seller still retains ownership over the property as these payments are being made. Once the final payment is made, according to the terms of a conditional sales agreement, then the buyer takes full ownership and is given the title or other appropriate document. A potential drawback of using a conditional sales agreement is that by the time a buyer owns something, it may no longer be worth what it cost. Items diminish or depreciate in value over time, and someone buying an item over five years pays what it was worth originally, not the value of it at the end of payments five years later.

During the time it takes for a conditional sales agreement to be completed, the seller of an item typically retains certain rights of repossession. The exact nature of these rights can depend on the terms of the agreement, though a seller of a vehicle may be able to repossess it if payments are no longer made. For other items, such as expensive professional machinery, the seller may be able to enter the premises of a buyer in order to enforce repossession. Such terms within a conditional sales agreement are usually implemented only if the seller violates the agreement in a major way.