How does retention of title work?

4 May 2021

In order to help suppliers, retention of title is included in the law. If your company sells and delivers products to a customer, then based on the law that customer becomes the owner of those products, even if that customer does not pay for those products. Payment is not one of the legal requirements for transfer of ownership. The requirements for transfer of ownership are that there must be a legal title (often a purchase agreement), that your company is authorised to sell the products and that the products have been delivered (often by actual transfer of control).

The transfer of ownership can lead to unpleasant consequences. For example, if the customer goes bankrupt, your company cannot claim these products. After all, the products have become the property of the customer. Your company can then submit a claim to the receiver, but the chance that your company will receive a payment from the receiver is very small. Also, it may not be advantageous for your company's financing coverage if your company does not have the ownership of the products supplied by your company.

If your company and the customer agree on a retention of title, you are agreeing, in short, that as long as no payment is made, your company remains the owner of the products delivered by your company.

There are three types of retention of title: narrow, extended and prolonged.

  • With a narrow retention of title, your company only remains the owner of the products that have not been paid for. Products that have been paid for become the property of the customer.
  • With extended retention of title, your company, as long as there is a claim against the customer, also remains the owner of the products that have been paid for, until the claim has been settled in full. This is the most common type of retention of title.
  • In the case of extended retention of title, the retention of title continues to apply to products in which the products supplied by your company have been processed. Under Dutch law, however, it is not possible to extend retention of title to goods manufactured from the delivered products.

General terms and conditions

Retention of title is often included in general terms and conditions. In practice, this often gives rise to legal problems.

After all, general terms and conditions must first apply to the agreement between your company and the customer. If, for example, general terms and conditions are only declared applicable on the invoice of your company, this is too late; the agreement has then already been concluded some time ago. This could be different if there is a permanent commercial relationship between your company and the customer, whereby the general terms and conditions have always been declared applicable on the invoices.

Secondly, it is the main rule that general terms and conditions must be handed over to the customer when the agreement is entered into, which means that your company must hand over the general terms and conditions to the customer. Therefore, referring to the website of your company on which the general terms and conditions can be found, referring to and submitting your company's general terms and conditions for inspection at the Chamber of Commerce, and/or sending your company's general terms and conditions free of charge upon first request, does not suffice.

Your company can send the general terms and conditions by e-mail if the agreement is also concluded by e-mail.

Accession, confusion and specification of property

In case of accession, confusion and specification of an object, your company cannot rely on a retention of title, because the products delivered by your company no longer exist as independent legal objects.

There is an accession of movable goods when one of the movable goods becomes a constituent part of another movable good (the main object). Which of the two items is to be considered as the principal depends on the value of the items; the item with a significantly higher value is normally the principal. An item can also be designated as the main item on the basis of common opinion. An example is the bicycle bell which becomes part of the bicycle by accession.

An accession between movable property and immovable property (such as a building) occurs when the movable property becomes part of the immovable property. A constituent part exists when a movable object and an immovable object are joined together if the movable object cannot be separated from the immovable object without significant damage. In the past, the term 'permanently fixed ' was used. Also based on common opinion , movable property can be considered part of immovable property. An example is a situation in which a building and a machine are specifically geared to each other from a constructional point of view and the building must be regarded as incomplete from the point of view of its suitability as an industrial building in the absence of the machine.

Confusion occurs when two movable items are combined into one. This can quickly occur when liquids or gases are mixed together. There can also be improper confusion, for example if the unmarked nails delivered by your company are placed by the customer in a large box with unmarked nails delivered by another company. Your company can then no longer prove exactly which individual nails your company has delivered.

The specification of property occurs when a new object is formed from one or more items. If the customer forms a new object for itself from those products, the customer becomes the owner of that new object. To answer the question of when someone has created a new good 'for himself', it is necessary to look at (1) who has the decisive influence on the method of production and the final form of the new good and (2) who bears the commercial risk.

Resale

If the customer in turn resells the products to a third party, your company will generally no longer be able to invoke retention of title. This is because the customer of your products is often contractually or tacitly authorised to resell the delivered products. But even if that is not the case, the ultimate customer is protected, if the customer is in good faith. This would only be different if the ultimate customer were aware of the retention of title or knew that it was customary in the sector for delivered products to be delivered under retention of title and the ultimate customer knew that the purchaser was in financial difficulties.

The tax authorities' right of seizure

If your company has delivered products under retention of title, and those products are intended to remain permanently with the customer (such as inventory), your company runs the risk of the tax authorities exercising their right to seize the assets in the event of tax debts.

Right of recovery

Suppose that there is no legally valid retention of title, for example because the general terms and conditions in which retention of title is included do not apply or the general terms and conditions have not been handed over, then the right of recovery may offer a solution. The right of recovery is, remarkably enough, a rather unknown right, although it is a very strong one.

When invoking the right of recovery, your company dissolves the purchase agreement and can claim the delivered products as its owner. The right of recovery goes beyond the dissolution of a contract, as the ownership reverts to your company. The prerequisite is:

  1. that the purchase price has not yet been paid and the customer is in default;
  2. that the right of recovery is invoked in writing;
  3. that the right of recovery is invoked in good time, both within six weeks of the payment deadline on your company's invoice being exceeded and within sixty days of the products being brought into the control of the customer.