Retention of title

What it means

Retention of title is a term in a purchase contract under which the buyer becomes owner of the goods only once the full price has been paid, even though the seller hands the goods over earlier. The buyer uses the goods but the seller remains the owner. It is a simple and effective way to secure a claim when selling on instalments or deferred payment terms.

In business relationships the retention must be agreed in writing. It is not used for real estate, where security is arranged differently, for example with a mortgage or escrow. For movable goods it is common especially when selling machinery, equipment, vehicles or goods the buyer does not process further.

Retention of title matters most when the buyer does not pay or becomes insolvent. As owner, the seller can demand the goods back. In the buyer's bankruptcy, it can have goods listed by the trustee excluded from the bankruptcy estate rather than being paid pro rata with other creditors.

How it works in practice

We recommend using retention of title when selling valuable goods on credit, especially to new or less established customers. A clear sentence in the contract or in terms and conditions the buyer has accepted in writing is enough. It is also sensible to state it on the invoice, but the invoice alone does not replace the agreement.

Retention works well as long as the goods remain identifiable. If the buyer processes them, mixes them with other goods or resells them, the retention loses effect because the goods no longer exist in their original form or a third party acquires them in good faith. For raw materials and consumables it is therefore weaker security than for machinery.

In the seller's accounts a sale with retention of title is generally recorded as an ordinary sale, since risks and rewards have passed to the buyer. The buyer includes the goods in its assets even though it does not yet formally own them. In debt recovery the seller can choose between demanding payment or return of the goods.

What to watch out for

The most common mistake is stating retention only on the invoice or delivery note without the buyer's written agreement. Such a clause may not be validly agreed and will not help in bankruptcy. In bankruptcy, the strict deadlines for an exclusion action must also be remembered, or the seller loses the goods.

Watch out for conflicts with other security. If the buyer pledges the goods to a bank or transfers them by security transfer, disputes over priority arise. The seller should also consider security through a registered charge, especially for large amounts and long payment terms.