What is Retention of Title?

Retention of title gives the seller a powerful tool to reduce payment risk. Unlike an unsecured claim against an insolvent debtor — where you join a queue of creditors for a fraction of what you are owed — a valid retention of title clause means you are the legal owner and can reclaim your goods directly.

For a retention of title clause to be valid, several conditions must be met. First, it must be agreed in writing before or at the time of delivery. A retention of title invoked for the first time after delivery has no legal effect. In practice, the clause is included in the general terms of sale that are declared applicable at the point of order.

Second, the goods must be individually identifiable. If goods have been processed, mixed with others, or resold, enforcing the clause becomes significantly more complex. Extended retention of title clauses address this by covering claims the buyer holds against third parties as a result of resale.

Third, the position of good-faith third-party buyers matters. If the buyer has resold the goods to a third party who was unaware of the retention of title, the right may be lost under certain conditions. Swift action when a customer shows signs of financial distress is therefore essential.

In practice, retention of title clauses are often omitted from general terms or drafted too vaguely to be enforceable. A robust clause should specify: the description of the goods covered, the scope (basic or extended), and the procedure for reclaiming goods.

When a customer becomes insolvent, a valid retention of title clause is the difference between reclaiming your goods and filing an unsecured claim with the administrator. In the first case, you recover your property immediately; in the second, you may wait years and receive a fraction of your claim.

For businesses that deliver on credit — particularly to customers whose financial position is unclear — retention of title is a basic form of credit risk management. Check whether your general terms contain a valid and well-drafted retention of title clause and whether they are properly incorporated before each delivery.