Retention of title: Overview, definition, and example
What is retention of title?
Retention of title is a legal clause in a contract, typically used in sales agreements, that allows the seller to retain ownership of goods or property until the buyer has paid the full purchase price. Despite the goods being delivered or transferred to the buyer, the title (ownership) remains with the seller until payment is completed. If the buyer fails to pay, the seller has the right to reclaim the goods. This provision is commonly used in transactions where goods are sold on credit.
For example, if a company sells machinery to a business on credit, the seller may include a retention of title clause in the agreement, ensuring that the machinery remains the property of the seller until the business pays the full purchase price.
Why is retention of title important?
Retention of title is important because it provides security for the seller, ensuring that they retain ownership of the goods until full payment is made. This helps mitigate the risk of non-payment in credit transactions, as it provides a legal basis for the seller to reclaim goods if the buyer defaults. It also provides the seller with a clear remedy if the buyer fails to fulfill their payment obligations, giving them a degree of control over the goods.
For buyers, understanding retention of title clauses is important because it means that even though they may take possession of the goods, the seller still holds the legal ownership until the goods are fully paid for. For sellers, retention of title ensures that they are protected in case the buyer faces financial difficulty or defaults on payment.
Understanding retention of title through an example
Imagine a manufacturer who sells a batch of electronic components to a retailer on credit, with a retention of title clause in the contract. The retailer takes possession of the components but has not yet paid for them. If the retailer later goes bankrupt before completing payment, the manufacturer can invoke the retention of title clause to reclaim the components, even though they are in the retailer’s possession.
In another example, a car dealership sells a vehicle to a customer under a retention of title agreement, allowing the customer to take possession of the car immediately. However, the dealership retains ownership of the car until the customer has paid the full price. If the customer defaults on the payments, the dealership has the right to repossess the car.
An example of a retention of title clause
Here’s how a retention of title clause might appear in a sales agreement:
“Notwithstanding the delivery of the Goods, ownership of the Goods shall remain with the Seller until the Buyer has paid the full purchase price. The Buyer agrees to hold the Goods as bailee for the Seller until full payment is made and grants the Seller the right to reclaim the Goods in the event of non-payment.”
Conclusion
Retention of title is a valuable tool for sellers in credit transactions, ensuring that they retain ownership of goods until payment is fully received. It protects sellers from the risk of non-payment and provides a legal mechanism for reclaiming goods in case of default. For buyers, understanding retention of title clauses is crucial, as it affects their rights and obligations with respect to the goods they purchase, even after taking possession.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.