Why you should include a retention of title clause in your terms and conditions?

Thibault Caeymaex Thibault Caeymaex
Ann Vranken Ann Vranken
Analyse

Sellers and suppliers of movable assets can avoid problems caused by poorly-paying customers through a retention of title clause.

This clause makes it contractually possible to stipulate that ownership of a certain good does not transfer until the purchaser has paid the full price.

The Law on Pledges has created a better legal framework for the retention of title clause, putting any creditor - assuming a retention of title clause has been included - in a stronger position.

1. What is a retention of title clause?

The retention of title is a security right that serves as protection against a debtor in default. In that case a sale is completed when is agreed that the right of ownership is transferred to the buyer only when the price, which is the consideration for the transfer, has been paid in full. 

In other words, the good only comes into the possession of the purchaser upon full payment of the price.

Including a retention of title clause in a contract of sale is a technique. Once a sale is completed and the purchaser has obtained ownership by operation of law after the parties have agreed on the good and the price, nothing prevents the parties from agreeing to postpone the transfer of ownership until the price has been paid in full. Provisions in respect of completed sales are not of a public order.

This clause is also of exceptional importance in the event that the debtor-buyer goes bankrupt. After all, bankruptcy leads to the concurrence of creditors. As a result, they are put on an equal level in the distribution of the liquidation proceeds of their common debtor, unless they have a privilege that allows them to take priority over the other creditors (e.g. a mortgage). A seller who has stipulated a retention of title clause may, in the event of bankruptcy of the buyer-debtor, uphold to the other creditors that the property in question actually belongs to him and thus escape the concurrence of creditors.

Although there is no legal definition of the concept of retention of title, a description of it can be found in the "Law on Pledges". This law, which came into force on 1 January 2018, creates a legal framework for retention of title, replacing the previously applicable legal regime of the "Bankruptcy Law".

2. How is retention of title regulated?

The Law on Pledges provides for a legal basis in the Belgian Civil Code for the retention of title clause and abolishes the provisions of the Bankruptcy law.

The Law on Pledges set forth that the seller who has stipulated a retention of title clause, has the right to recover its goods if the buyer fails to pay the price in full.

Furthermore, retention of title will apply regardless of the legal nature of the agreement in which it was included. This means that it no longer only applies to a sale agreement but also to other agreements, such as exchange, donation, acceptance, contracting... etc. 

For example, a retention of title can be stipulated by a contractor who, in addition to providing his services, also provides the building materials. Previously, this might have lead to discussions. 

Furthermore, retention of title can now be invoked in any form of concurrence of creditors, and not only in the event of bankruptcy. Retention of title can also be invoked in the event of collective debt settlement or seizure.

The following conditions have to be met:

  • The retention of title clause must be in writing.

    It is advisable to include this clause in the general terms and conditions, which are usually found on the backside of the offer or quotation, with a reference to the front of the document.
    If the parties are bound by a framework agreement, the creditor must ensure that it refers to the framework agreement at each successive sale. Indeed, the law requires that the retention of title clause must be referred to in writing at each sale.

  • The buyer must be aware of the retention of title clause at the latest at the time of delivery of the goods, e.g. in an offer, on an order form or a delivery note.

Attention! The rules have become even more stringent for cases in which the buyer is a consumer. In that case, the buyer's consent must be evidenced by the document itself. The retention of title will only apply if the consumer has explicitly given his consent in writing to the clause.

3. Retention of title is stronger than before

Goods are no longer required to be present in kind, as they were previously required to be by the Bankruptcy Law.

  • The right to subrogation is a first option, which allows a claim for payment of the price to replace the encumbered goods, if the goods have been sold, destroyed, damaged or have suffered loss of value.

  • Retention of title will also apply to the fruits borne by the encumbered goods. This means that, for example, the seller of shares will also be able to exercise his retention of title on the dividends.

  • Furthermore, retention of title will also continue to be relevant for goods that have been mixed or processed into new goods.

    If a new good is created by authorised processing, retention of title will apply to the newly created good, unless otherwise agreed.

    But sometimes processing the goods is not allowed. 
    If the movable good of a retention of title is processed in such a way that a new object is created as a result, the retention of title subject to it shall be extinguished, unless the value of the original object substantially exceeds the cost of the labour and materials required for the work. In the latter case, the owner of the original good becomes the owner of the new good.
    But if the processor becomes the owner of the result of the operation, he shall be liable to pay compensation to the owner of the original good on the basis of the contract or unjustified enrichment. If, on the other hand, the original owner remains the owner, the processor may claim compensation under the contract or for unjustified enrichment.

    In the event that goods of third parties were used for such processing, and the separation of these goods is either impossible or not economically justifiable, the retention of title shall encumber the newly created goods, if this is the most important or has the greatest value. In that case, the third party has a claim for unjustified enrichment on the debtor. This means that the value of the good must be set off against the value of the claim and that any capital gain must be repaid to the third party.
  • The mixing of replaceable goods that have been encumbered in whole or in part with a lien by one or more retention of title clauses shall not affect the retention of title.
    If there are several persons having stipulated a retention of title clause, they may assert their right to lien on the mixed goods in proportion to their rights. 
  • Retention of title shall also remain in force if the encumbered goods have become of an immovable nature through incorporation. However, for this purpose, the retention of title is required to be registered in the Pledge Register.

    Movable property becomes immovable through incorporation by attaching it to immovable property, such as heating appliances, kitchen cabinets and kitchen appliances, sanitary wares such as a bath or a washing table, etc.

4. Act quickly when your debtor-buyer goes bankrupt

If the debtor-buyer goes bankrupt, the creditor with a retention of title has every interest in acting swiftly to recover his goods.

Indeed, although bankruptcy does not affect the owner's right to claim the debtor's goods, the creditor must nevertheless, on penalty of forfeiture, exercise its right to claim ownership before the first report on the verification of claims is filed by the bankruptcy receiver.

In order to "exercise" its claim, the creditor does not necessarily have to sue the debtor. It is already sufficient to notify its intention to make use of the clause.

In other words, when a court declares a company bankrupt and initiates the proceedings, its judgement - which is published in the Belgian Official Gazette - should order that the creditors are obliged to file their statement of claim with the court registry within a period that it determines. This period is generally 30 days. At the end of this period, a first report on the verification of claims is drawn up by the bankruptcy receiver.

Once this report has been drawn up, the retention of title clause can no longer be exercised.

5. Registration of retention of title in the Pledge Register

Registration of a retention of title clause in the Pledge Register is an optional right.

If it is possible for the encumbered goods to become immovable through incorporation, the title retention must be registered in the Pledge Register.

After a retention of title on a certain good has been registered in the Pledge Register, it comes with priority over a mortgage. This priority will even apply if the registration took place after the registration of the mortgage, provided that the registration takes place before the incorporation itself.

Needless to underline that the registration of a title retention clause in the Pledge Register provides additional protection.

The registration however is not free of charge, and is temporarily. It must be renewed from time to time as well. Depending on the value of the goods to which the retention of title applies, the fee amounts from € 20 up to € 500.

6. Conclusion

The retention of title has finally received a legal framework following the Law on Pledges, allowing a broader scope and an efficient use thereof.

In any case, it is advisable to include a retention of title clause in the general terms and conditions in all your sales documents, such as quotations, order forms, building contracts, etc. ... and having these signed by the buyer. This is mandatory if the latter is a consumer.

The retention of title provides additional protection in certain circumstances and even more if it has been registered in the pledge register. But this registration is not mandatory and remains an optional right unless when an encumbered good can become immovable through incorporation. In that case, the retention of title must be registered in the Pledge Register. It would not be the first time a supplier of building materials is left with a non collectible claim after a contractor went bankrupt.

Do not forget that registration of the retention of title must be entirely or partially removed when the price of the goods has been paid, either in full or partially respectively.

It goes without saying that we would be happy to assist you in drawing up your general terms and conditions.

Would you like to learn more about this subject?

Contact our experts or telephone +32 (0)2 747 40 07
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