Retention of title
What is a retention of title?
Under a retention of title clause, the seller (seller with retention of title) retains ownership until the purchase price has been paid in full. However, the goods are already handed over to the buyer (buyer with retention of title), who is also permitted to use them (or, where applicable, to dispose of them). Once the purchase price has been paid in full, ownership is finally transferred to the buyer.
When should a retention of title clause be agreed?
The problem arises particularly in the case of credit sales, which are widespread in practice, where the buyer receives the goods immediately but is granted a payment term. In principle, ownership passes to the purchaser upon handover of the goods. However, if the seller has not yet received payment, an immediate transfer of ownership would expose them to a significant risk that, in the event of the buyer’s insolvency, the debt would only be recoverable up to the amount of the dividend. It is therefore advisable to agree a retention of title in the case of credit sales.
What do you need to bear in mind in the event of insolvency?
However, the Insolvency Code prohibits the termination of contracts that would jeopardise the continued operation of the debtor’s business for a period of six months from the opening of insolvency proceedings, unless there is good cause or the prohibition would result in serious detriment to the other party to the contract. In the event of the buyer’s insolvency, where the purchase price has not been paid in full, the seller with retention of title may withdraw from the contract of sale and separate the purchased goods (right of separation). In this case, the insolvency administrator or, in restructuring proceedings under self-administration, the debtor may also withdraw from the contract of sale with the consent of the restructuring administrator, which likewise gives rise to a right of separation on the part of the seller retaining title.
What special provisions apply when agreeing a retention of title?
The buyer subject to retention of title often acquires the goods in order to resell or process them as part of their business operations. In the case of a resale in the course of business, the retention of title is usually extinguished due to the second purchaser’s acquisition in good faith. To protect the seller retaining title, the legal concept of extended retention of title was developed for this scenario, whereby the buyer under retention of title assigns in advance any claims arising from the resale of the goods to the seller retaining title (assignment of claims). However, as this assignment is a security assignment which requires a specific act of public notification to be effective, the practical effect of such an extended retention of title is, of course, limited.
Unless otherwise agreed between the seller retaining title and the buyer, the processing by the buyer of goods supplied subject to retention of title results in the seller retaining title and the buyer retaining title who has processed the goods shall acquire co-ownership of the resulting item in proportion to their respective contributions to its value. This does not apply in the event of the inseparable combination of the goods delivered subject to retention of title with immovable property (e.g. real estate), which in any event results in the retention of title ceasing to apply. In practice, it is not uncommon for several sellers retaining title to supply goods of the same kind to the buyer retaining title, and for these goods to be commingled at the buyer’s premises in such a way that it is no longer possible to attribute the respective goods to a specific seller retaining title. Even in such a case, a claim for separation by the individual sellers retaining title is recognised in the event of the buyer’s insolvency under the heading of ‘vindication of quantity’.
Learn more about our Banking and Finance Law practice area. Please feel free to contact us for further information.