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What are retention of title clauses?
Retention of title clauses gives the seller of goods priority over secured and unsecured creditors of the buyer if the buyer fails to pay for the goods.
The aim of a retention of title clause is to allow the unpaid seller to reclaim possession of the goods.
What types of retention of title clauses are there?
There are different types of retention of title clauses as follows.
Basic clauses
A basic clause provides that title to the goods is retained by the seller until it has received full payment for the goods. When drafting a basic clause, it is important to ensure that both legal and beneficial title are retained as the reservation of the beneficial title alone will not be sufficient. Basic clauses should be supplemented by the following other clauses:
- A right for the seller to repossess the goods. This is normally exercisable on a specific event, e.g. non-payment but could also be exercisable at any time. Please note; however that following the Corporate Insolvency and Governance Act 2020 coming into force, a seller will not be able to enforce a retention of title clause upon a buyer becoming insolvent unless an exception applies.
- A right to prevent the buyer from selling or using the goods. As above, this can be exercised upon non-payment or at any time but should not be exercised upon the buyer becoming insolvent.
- A right for the seller to enter the buyer's premises in order to repossess the goods.
- An obligation on the buyer to:
- Store the seller's goods separately from other goods belonging to other third parties;
- Mark the goods as the seller's property; and
- Allow the seller access to the buyer's premises to verify that this has been done.
- If the goods supplied might be attached to the buyer's premises (e.g. heavy plant or machinery), it is recommended to include a provision prohibiting the buyer from annexing them to their premises without the seller's consent. If goods do become annexed to the buyer's premises, the consent of the owner of those premises will be necessary if the seller is to be entitled to repossess them in the event of non-payment by the buyer.
All monies clauses
An all monies clause is where the seller reserves ownership of the goods supplied until the buyer has paid not only for those particular goods but also for any other goods supplied by the seller to the buyer.
It has been suggested that an all monies clause creates a charge by the buyer in favour of the seller, which would be void against any liquidator or administrator and any creditor of the buyer unless registered at Companies House in accordance with the Companies Act 2006.
Although possible in theory, registering a charge at Companies House is for a number of practical reasons unlikely to be a realistic option.
Therefore, it is advisable to separate out an all monies clause from other retention of title clauses so that the all monies clause could be severed from the other retention of title clauses if it were ever held to be invalid by the Court for lack of registration as a charge.
Proceeds of sale clauses
A proceeds of sale clause enables the seller to assert rights in the proceeds of sale to satisfy the purchase price of the goods. However, in light of recent case law, it is now extremely difficult, if not impossible, to draft a proceeds of sale clause without it being construed as a charge over goods which would be unenforceable unless registered as a charge at Companies House. Specialist legal advice should be obtained on the inclusion of a proceeds of sale clause in standard terms and conditions.
Mixed goods clauses
These are useful when a seller sells goods for use in a manufacturing process, e.g. the seller is selling components rather than a finished product. In such circumstances, basic retention of title clause is unlikely to be sufficient.
The case law on mixed goods clauses is complicated but essentially distinguishes between:
- Goods that maintain their identity, even if attached to other goods. In this case, the seller retains title to their goods, so a basic retention of title clause is likely to still be effective. Whether goods maintain their identity after being attached to other goods is a question of fact. Relevant factors include:
- Whether the goods are in their original form; and
- Whether the goods can easily be removed from other products.
- Goods that lose their identity in the manufacturing process. In this situation, the seller's title in the goods is lost, and title in the resulting product vests with the buyer. A basic retention of title clause is likely to be ineffective here.
Therefore, a mixed goods clause is sometimes added to a basic retention of title clause to enable the seller to assert rights of ownership in any new product resulting from the manufacturing process. However, the Courts have held that any retention of title clause which gives a seller rights over new goods will create a charge which will be ineffective if not registered. Sellers of products that are used within a manufacturing process should therefore consider other means of securing their purchase price, such as credit insurance.
Limits on the effectiveness of retention of title clauses
There are some limits on the effectiveness of retention of title clauses as follows:
- Company in administration. If the buyer is a company in administration, the consent of the administrator or the Court is required before goods can be repossessed. This prohibition also applies during any interim moratorium in administration, for example, if a notice of intention to appoint an administrator has been filed.
- The Corporate Insolvency and Governance Act 2020. This Act introduced what is known as a Part A1 moratorium which is designed to allow financially distressed companies a short breathing space from enforcement action by certain types of creditors whilst the company organises their affairs to try and make the business viable. If a buyer is subject to a Part A1 moratorium, the seller may not repossess goods in the buyer's possession without the Court's permission.
- During the moratorium, the buyer may dispose of goods in its possession that are subject to a retention of title clause with the Court's permission. The Court can only permit goods to be sold if it thinks it will support the rescue of the company as a going concern.
- Incorporation of the retention of title clauses. Retention of title clauses must be properly incorporated into the contract between the buyer and the seller in order to be enforceable.
- However, as retention of title clauses are not unusual, no special notice needs to be given in respect of them.
- Inconsistent with the trading relationship. A retention of title clause may be ineffective if its operation is inconsistent with the overall trading relationship between the parties. For example, an all monies clause is unlikely to be effective if goods are supplied for immediate resale.
- Low resale value. Retention of title clauses is unlikely to be of any practical value where the goods supplied are perishable or have a low scrap value.
- Changing case law. Retention of title is an area of the law where the decisions made by the Courts can change on a relatively frequent basis. Particular clauses can become ineffective because of a Court decision.
- Therefore, it is important to review retention of title clauses on a regular basis.
Alternatives to retention of title clauses
Retention of title clauses should be considered adjuncts to a proper credit control system, not as a substitute. Where a seller has doubts about the buyer's financial position, the seller should consider:
- Reducing the period of credit allowed to the buyer, or the amount of credit, or both.
- Taking alternative forms of security, such as a bank guarantee or letter of credit.
- Obtaining credit insurance.
- Requiring some form of deposit or payment upfront before the goods are supplied.
- Asking the buyer to obtain some form of insurance policy that covers the risk of the buyer not being able to pay the seller. Seller's should ensure their interest in the goods is noted on the policy.
Conclusion
Retention of title clauses can help recover goods if a buyer fails to pay. However, retention of title clauses should sit alongside a proper credit control system which may hopefully avoid the need to rely on a retention of title clause.
Here to help
Our specialist team of Commercial Solicitors can assist with the drafting of retention of title clauses, and our specialist team of Commercial Litigation Solicitors can help with the enforcement of retention of title clauses. If you have any more questions or would like more information, you can contact our team below.
