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Does your company sell on credit? A guide to retention of title clauses under Danish law

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Legal news
calendar 11 January 2015
globus Denmark

Suppliers selling on credit have a natural interest in securing themselves against the buyer not wanting – or not being able – to pay the purchase price in full. Such security may be obtained by a retention of title clause giving the seller the right to repossess the goods, if the purchase price is not paid in full. It is free to insert a retention of title clause to an agreement, but the agreement has to meet certain conditions in order to be valid. In this newsletter we take a closer look at the Danish rules regarding retention of title clauses.

The title to the sold goods usually passes to the buyer as soon as the parties enters into the purchase agreement. This applies regardless of when – and if – the buyer pays the purchase price. Thus, the seller risks being left with no money and no goods, if eventually the buyer cannot pay.

However, by adding a retention of title clause to the purchase agreement the sold goods remain the seller's property, until the purchase price is paid in full. This gives the seller the opportunity to retake possession of the goods if the buyer breaches his obligations – e.g. by not paying an installment in due time. Thus, a retention of title clause serves as the seller’s security for payment. And it is not only valid against the buyer, but also against any creditors and against the buyer’s bankruptcy estate.

The retention of title clause must be valid

Danish law provides for certain conditions a retention of title clause to be valid. All conditions must be met; otherwise the retention of title clause is invalid.

Many companies have standard terms and conditions containing reservation of title clauses. However, these standard terms often do not meet the legal requirements, and thus the seller is left with nothing but a false sense of security. Not only will the seller have no right to repossess the goods, the consequence of an invalid retention of title clause is also that the seller loses his security against the buyer’s other creditors or bankruptcy estate, and the seller risks being left no other options than to file an unsecured non-priority claim against the estate.

How to secure retention of title

The five most important conditions for a retention of title clause to be valid are:

  1. Retention of title must be a part of the parties’ agreement by the time the buyer takes the goods in his possession, and the security provided thereby must be limited to the actual purchase price
  2. The total purchase price must be at least DKK 2.000 (approx. EUR 270)
  3. The secured amount shall be fixed; thus retention of title cannot serve as security for an overdraft
  4. If the buyer is a consumer, there has to be a down payment accounting for at least 20 % of the full purchase price
  5. Finally, the retention of title clause must be clear and concise

All conditions must be met by the time the buyer takes possession of the goods. In principle, this means that it is not possible to remedy any shortcomings subsequently. Furthermore, the time requirement means that a retention of title clause cannot serve as a last resort, if the seller realizes that credit has been allowed to an insolvent buyer.

A special problem arises when a seller includes a retention of title clause on the back of the invoice. This is not uncommon, but as invoices are usually forwarded at a time where the buyer has already taken the goods in his possession, such reservations will often be invalid.

For the sake of good order it should be mentioned, that retention of title in a registered car must be registered with the Danish motor vehicles securities register. This will not be further addressed.

Alternatives to retention of title

The concept of retention of title is designed to secure purchase price payments. For that reason, many sellers tend to choose this opportunity to secure the payment, but there are other possibilities.

One alternative worth mentioning is the seller’s possibility to take a chattel mortgage on the sold goods. The security of a mortgage is not limited to the purchase price, but it allows the seller to secure any current and / or future outstanding amounts. This is the greatest advantage compared to a reservation of title. However, the mortgage is not as simple to obtain and secure, since it i.e. requires registration in Danish register of chattel mortgages.

In this regard, it should be noted that Danish law prohibits chattel mortgages in connection with consumer sales, which makes retention of title the only practical solution for anyone selling to consumers on credit, wanting to obtain security for payment.

IUNO’s opinion

IUNO recommends that anyone selling on credit and wishing to secure the purchase price using retention of title makes sure that all conditions for a valid reservation are met. If the conditions are not met the seller risks being left with nothing but an unsecured claim.

Furthermore, it is important to be aware that the validity conditions vary from country to country. When marketing and selling goods in more than one country the seller risks that sales agreements are governed by varying national legislation. For that reason IUNO recommends that sellers always check up on the rules in the countries in which they operate.

The title to the sold goods usually passes to the buyer as soon as the parties enters into the purchase agreement. This applies regardless of when – and if – the buyer pays the purchase price. Thus, the seller risks being left with no money and no goods, if eventually the buyer cannot pay.

However, by adding a retention of title clause to the purchase agreement the sold goods remain the seller's property, until the purchase price is paid in full. This gives the seller the opportunity to retake possession of the goods if the buyer breaches his obligations – e.g. by not paying an installment in due time. Thus, a retention of title clause serves as the seller’s security for payment. And it is not only valid against the buyer, but also against any creditors and against the buyer’s bankruptcy estate.

The retention of title clause must be valid

Danish law provides for certain conditions a retention of title clause to be valid. All conditions must be met; otherwise the retention of title clause is invalid.

Many companies have standard terms and conditions containing reservation of title clauses. However, these standard terms often do not meet the legal requirements, and thus the seller is left with nothing but a false sense of security. Not only will the seller have no right to repossess the goods, the consequence of an invalid retention of title clause is also that the seller loses his security against the buyer’s other creditors or bankruptcy estate, and the seller risks being left no other options than to file an unsecured non-priority claim against the estate.

How to secure retention of title

The five most important conditions for a retention of title clause to be valid are:

  1. Retention of title must be a part of the parties’ agreement by the time the buyer takes the goods in his possession, and the security provided thereby must be limited to the actual purchase price
  2. The total purchase price must be at least DKK 2.000 (approx. EUR 270)
  3. The secured amount shall be fixed; thus retention of title cannot serve as security for an overdraft
  4. If the buyer is a consumer, there has to be a down payment accounting for at least 20 % of the full purchase price
  5. Finally, the retention of title clause must be clear and concise

All conditions must be met by the time the buyer takes possession of the goods. In principle, this means that it is not possible to remedy any shortcomings subsequently. Furthermore, the time requirement means that a retention of title clause cannot serve as a last resort, if the seller realizes that credit has been allowed to an insolvent buyer.

A special problem arises when a seller includes a retention of title clause on the back of the invoice. This is not uncommon, but as invoices are usually forwarded at a time where the buyer has already taken the goods in his possession, such reservations will often be invalid.

For the sake of good order it should be mentioned, that retention of title in a registered car must be registered with the Danish motor vehicles securities register. This will not be further addressed.

Alternatives to retention of title

The concept of retention of title is designed to secure purchase price payments. For that reason, many sellers tend to choose this opportunity to secure the payment, but there are other possibilities.

One alternative worth mentioning is the seller’s possibility to take a chattel mortgage on the sold goods. The security of a mortgage is not limited to the purchase price, but it allows the seller to secure any current and / or future outstanding amounts. This is the greatest advantage compared to a reservation of title. However, the mortgage is not as simple to obtain and secure, since it i.e. requires registration in Danish register of chattel mortgages.

In this regard, it should be noted that Danish law prohibits chattel mortgages in connection with consumer sales, which makes retention of title the only practical solution for anyone selling to consumers on credit, wanting to obtain security for payment.

IUNO’s opinion

IUNO recommends that anyone selling on credit and wishing to secure the purchase price using retention of title makes sure that all conditions for a valid reservation are met. If the conditions are not met the seller risks being left with nothing but an unsecured claim.

Furthermore, it is important to be aware that the validity conditions vary from country to country. When marketing and selling goods in more than one country the seller risks that sales agreements are governed by varying national legislation. For that reason IUNO recommends that sellers always check up on the rules in the countries in which they operate.

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