Retention of title

Ownership is the most comprehensive right a person can have in a good, according to the Civil Code. First of all, that means that others must respect that person’s ownership. As a result of this right, it is up to the owner to determine what happens to his goods. For example, the owner can decide to transfer the ownership of his good to another person by means of a purchase agreement. However, for a valid transfer a number of legal conditions must be met. The condition that ultimately transfers the ownership of the good is the delivery of the good in question, for example by literally handing it over to the buyer, and not the payment of the purchase price as is generally thought. In other words, the purchaser becomes the owner of the good at the time of its delivery.

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No retention of title agreed

In particular, the above will be the case if you have not agreed with the buyer in terms of retention of title. Admittedly, in addition to the delivery, the purchase price as well as the term within which payment thereof by the buyer must be made are agreed in the purchase agreement. However, unlike delivery, (the payment of) the purchase price is not a legal requirement for the transfer of ownership. It is therefore possible that the buyer initially becomes the owner of your goods, without having paid (the full amount) for it. Will the buyer not pay after that? Then you cannot simply reclaim your goods, for example. After all, the non-paying buyer can simply invoke the acquired right of ownership on that good and you are expected to respect his right of ownership in the item in question this time. In other words, in that case you will be without your good or payment and therefore empty-handed. The same applies if the buyer intends to pay but before the actual payment takes place, is faced with bankruptcy. This is an unpleasant situation that can be avoided by the way.

Retention of title as a precautionary measure

After all, prevention is better than cure. That is why it is wise to use the possibilities that are available. For example, the owner of the good can agree with the buyer that ownership will only pass to the buyer if certain conditions are met by the buyer. Such a condition can, for example, also relate to the payment of the purchase price and is also called retention of title. Retention of title is regulated in Article 3:92 of the Dutch Civil Code and, if agreed, thus has the effect that the seller remains legally owner of the goods until the buyer has paid the full agreed price for the goods. Retention of title then serves as a precautionary measure: does the buyer fail to pay? Or will the buyer face bankruptcy before paying the seller? In that case, the seller has the right to reclaim his goods from the buyer as a result of retention of title stipulated. If the buyer does not cooperate in the delivery of the goods, the seller can proceed to seizure and execution by legal means. Because the seller has always remained the owner, his good does not fall into the buyer’s bankruptcy estate and can be claimed from that estate. Is the condition of payment fulfilled by the buyer? Then (only) ownership of the good will pass to the buyer.

An example of retention of title: hire purchase

One of the most common transactions in which the parties make use of retention of title is the hire purchase, or the purchase of, for example, a car on installment that is regulated in Article 7A: 1576 BW. Hire purchase therefore involves buying and selling on installment, whereby the parties agree that ownership of the sold good is not only transferred by delivery, but only by fulfilling the condition of full payment of what is owed by the buyer under the purchase agreement. This does not include transactions relating to all immovable property and most registered property. These transactions are excluded by law from hire purchase. Ultimately, the hire-purchase scheme aims with its mandatory provisions to protect the buyer of, for example, a car against taking a hire purchase too lightly, as well as the seller against a too one-sided strong position on the part of the buyer.

Effectiveness of retention of title

For the effective operation of retention of title, it is important that it is recorded in writing. This can be done in the purchase agreement itself or in a completely separate agreement. However, retention of title is usually laid down in the general terms and conditions. In that case, however, it must be borne in mind that legal requirements regarding the general conditions must be met. More information about the general terms and conditions and the applicable legal requirements can be found in one of our previous blogs: General terms and conditions: what you need to know about them.

It is also important in the context of effectiveness that the retention of title to be included is also valid. To this end, the following requirements must be met:

  • the case must be determinable or identifiable (described)
  • the case may not have been incorporated into a new case
  • the case may not have been converted into a new case

Moreover, it is important not to formulate provisions regarding retention of title too narrowly. The narrower a retention of title is formulated, the more risks are left open. If several items are delivered to the seller, it is therefore wise, for example, to arrange for the seller to remain the owner of all items delivered until the full purchase price has been paid, even if part of these items have already been paid by the buyer. The same applies to the goods of the buyer in which the goods delivered by the seller are, or at least are processed. In this case, this is also referred to as an extended retention of title.

Alienation by the buyer subject to retention of title as an important point of attention

Because the buyer is not yet the owner due to an agreed retention of title, he is in principle also not able to make another legal owner. In fact, the buyer can of course do this by selling the goods to third parties, which also happens regularly. Incidentally, given the internal relationship with the seller, the buyer may nevertheless be authorized to transfer the goods. In both cases, the owner cannot reclaim his goods from a third party. After all, the retention of title has only been stipulated by the seller towards the buyer. In addition, the third party can, in the context of protection against such a claim of the buyer, rely on the provision of article 3:86 of the Civil Code, or in other words good faith. That would only be different if this third party knew the retention of title between the buyer and the seller or knew that it is customary in the industry for the goods delivered to be delivered under retention of title and that the buyer was financially ill.

Retention of title is a legally useful yet difficult construction. It is therefore wise to consult an expert lawyer before entering into a retention of title. Are you dealing with retention of title or do you need help drafting it? Then contact Law & More. At Law & More we understand that the absence of such retention of title or the incorrect recording thereof can have far-reaching consequences. Our lawyers are experts in the field of contract law and are happy to help you through a personal approach.

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