Table of Contents
In Short
- Retention of title clauses allow sellers to retain ownership until full payment is made, protecting them from buyer insolvency.
- Buyers should be aware of specific terms, like the right to repossess and obligations to keep goods separate.
- Negotiate clauses based on your bargaining power to limit seller control.
Tips for Businesses
Ensure you understand retention of title clauses before signing contracts. Review obligations, such as keeping goods separate, and clarify repossession terms. Use your negotiating leverage to adjust terms that may disadvantage your business, particularly regarding compliance and ownership risks.
If you are buying goods, your sales contract should have an express clause that specifies exactly when the title transfers. The sale of all goods involves legally transferring the title of the goods from the seller to the buyer. When this happens is a matter of negotiation and circumstance. Nevertheless, including a clause to this effect can minimise the chances of any dispute emerging in the future. This article will evaluate the commercial effect of retention of title clauses from the buyer’s perspective.
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Why Are Retention of Title Clauses Necessary?
Anything capable of being bought and sold has a legal title, which belongs to the owner. Hence, any agreement you make with a seller to buy their goods inevitably involves the transfer of the title from the seller. In exchange, you pay the seller for the value of the goods.
Absent any express term in the contract, you obtain title to the goods when you execute the contract. Where there is no written agreement, such as when you purchase goods from a retail store, you obtain the title at the point of sale. Hence, as a buyer, you benefit from receiving title to the good before you have paid for the goods.
However, from the seller’s perspective, this is less than ideal. Suppose the seller supplies the goods on credit, and you later become insolvent before payment. Because you have title to the goods and the goods are in your possession, the seller has no right to repossess the goods. As a result, sellers often try to negotiate a retention of the title clause in the purchase agreement.
What is the Effect of a Retention of Title Clause?
In short, a retention of title clause means the seller retains the legal title to the goods until you repay the seller. This is the case even if the goods are in your possession. While each retention of title clause depends on how it is drafted, the most restrictive retention of title clauses contains the following provisions whose effect you should be aware of.
1. The Right of Legal Entry Onto Your Premises
A seller who has retained the title over the goods has the legal right to repossess the goods in the event of the buyer’s insolvency. However, a right of repossession does not grant the seller the automatic right to enter your property. Instead, an express provision must grant them this right. Absent such a provision, the seller would be trespassing.
2. “All Monies Clause”
An ‘all monies clause’ grants the seller title to any goods they have sold you. Additionally, you retain the title to all the goods until you have repaid the buyer in full. Absent such a clause, the retention of title would only apply to the goods under the contract containing the retention of title.
3. The Buyer’s Obligation to Keep the Goods Separate from Other Goods
If the buyer wishes to repossess the goods, they may struggle to find them. This is especially problematic if the goods look similar to goods you obtained from other sellers. Hence, a clause that requires you to keep goods separate from other goods ensures can benefit the seller.
4. No Mixing With Other Goods
Retention of title clauses loses its effect once you use the goods in such a way that prevents the seller from recovering them. For instance, suppose you purchase paint from the seller. You would mix it with other goods by applying it to the wall. In such a case, you would therefore breach the contract. As mentioned above, this gives the seller the right to claim against you for breach of contract.
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Further Considerations For Retention of Title Clauses
As you can see, retention of the title clause is not in your interest as a buyer. However, from the seller’s perspective, it provides them with additional protection in the unfortunate event you become insolvent. If you are in a powerful bargaining position, you may successfully resist incorporating a retention of title clause. Otherwise, you should be familiar with their effect.
Key Takeaways
As a buyer, a retention of title clause is likely more favourable to the seller. A retention of title clause can mitigate the seller’s risk of you becoming insolvent before you have paid for the goods. A well-drafted retention of title clause contains several different provisions that strengthen the seller’s position. As a result, they are quite common in practice. However, the extent to which you can negotiate a retention of title clause depends on your bargaining position.
If you need help understanding the effect of a retention of title clause, our experienced contract lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0808 196 8584 or visit our membership page.
Frequently Asked Questions
A retention of title clause prevents the law from automatically transferring the legal title from the seller to the buyer when the buyer takes control of the goods.
If you retain the title to the delivered goods, you can repossess the goods if they do not repay if your customer becomes insolvent.
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