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What is a retention of title clause?

What is a retention of title clause?

What is a retention of title clause?

Sometimes referred to as a ‘romalpa clause’ or a ‘reservation of title clause’, a retention of title clause is a clause within a contract that allows a seller to retain the legal title to goods that have been sold and delivered to a buyer until such time as certain conditions within the sale contract have been met, usually that the goods have been paid for in full. 

What is a retention of title claim?

Retention of title, Romalpa, or reservation of title claims

A retention of title claim is where a seller tries to re-take possession of goods that have not been paid for but have already been delivered to a buyer under a sales contract containing a retention of title clause.

What does a ROT clause do?

Simply, a retention of title clause does two main things:

  1. It provides a seller with a mechanism to reclaim possession of goods in the event they are not paid for; and
  2. It places a seller of unpaid goods in a position of priority over any secured or unsecured creditors of a buyer in the event that the buyer becomes insolvent.

How does retention of title work?

A retention of title clause works by allowing physical delivery of goods to a buyer without transferring legal ownership until they have been paid for.

Whilst the buyer is in possession of the goods, but does not yet own them, a retention of title clause will usually place the buyer under a long list of obligations towards the goods (for example requirements as to storage, insurance and maintenance of the goods) until they have paid the seller for them.

Once the buyer has paid for the goods, the legal title will then pass to the buyer and they can be released from their obligations and do what they like with the goods (for example sell them on or use them in the manufacturing of something else).

When you can make a Romalpa claim

If the buyer fails to pay for the goods, the seller can begin a retention of title claim and attempt to re-take possession of the goods.

Alternatively, if the buyer fails to pay for the goods and then goes insolvent or into administration, the seller has a priority claim over other creditors of the buyer to re-take possession of their goods.

Is retention of title a PMSI?

No.  A PMSI is used to provide security against a loan; a lender can claim title to any assets purchased with the loan until the loan is repaid.

A retention of title clause means that a seller never hands title over to a buyer of specific goods until they have been paid for in full.

Does a RoT clause protect against repossession?

A retention of title clause allows the seller to repossess the goods on non-performance by the buyer of a condition within the sale contract (i.e. non-payment). So it does not protect a buyer from repossession but enables a seller to repossess.

Why do you need a retention of title clause?

A seller may want to include a ROT clause as it places them in a better position to claim back the goods if:

  1. The buyer does not pay for the goods delivered; or
  2. The buyer becomes insolvent.

What should retention of title clauses include?

Whilst the drafting of a retention of title clause is complex and a fine balancing act, some key features would include:

  1. Making sure it is properly incorporated into the contract of sale;
  2. Ensuring the seller retains the title to the goods;
  3. Providing the seller with a right to enter the buyer’s premises to recover the goods;
  4. Placing certain obligations on the buyer in relation to the care of the goods such as:
    1. An obligation to keep them separated and identifiable from other goods;
    2. An obligation to mark the goods as belonging to the seller;
    3. An obligation to ensure the goods;

Is retention of title enforceable?

They can be, however, you have to be careful when drafting and avoid certain pitfalls.

For example, you must be careful that a retention of title clause is not drafted in such a way that it is construed as an equitable charge as this would not be enforceable against a liquidator or administrator of an insolvent buyer unless it had been registered.

A seller must also act quickly in taking action to re-possess goods if they believe the buyer is or is about to become insolvent, as it will not be possible to re-possess the goods once a liquidator or administrator has disposed of them.

Read what makes a strong commercial contract here.

Retention of title solicitors in Bournemouth, Christchurch, Poole and The New Forest

Zoe is part of Frettens' bright and experienced corporate and commercial team. If you'd like to discuss shareholder agreements with us, you can call 01202 499 255 or click here.

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