Retention of Title (ROT) Clause Definition

A retention of title (ROT) clause is a contractual provision that allows the seller to retain legal ownership of commercial goods until they are paid for in full or other conditions are met. A ROT clause is a way to protect suppliers in the event that the buyer becomes insolvent or declares bankruptcy.

Without a ROT clause in the sales contract, the seller of the goods would have to get in line with other creditors if the buyer files for bankruptcy, potentially getting little, if anything, that it was owed. 

What Is a Retention of Title (ROT) Clause?

When drafting a sales contract in which goods are traded on credit, a seller may include a ROT clause to protect its financial interests. Typically, such clauses enable the seller to retain the title to the goods or equipment until the items have been paid for in full or—in the case of an “all monies” clause—until the buyer has paid all invoices owed to the seller. Should the buyer lack the funds to pay the seller in accordance with the purchase agreement, the ROT allows the seller to seize the goods and resell them for its own benefit.

Such clauses give sellers greater confidence when extending credit to buyers because they have a legal basis to take the goods back if, for example, the buyer becomes insolvent and has to file for bankruptcy. As long as the ROT clause is considered valid by the court with jurisdiction over the transaction, the seller is in a stronger position than the other creditors, who will have to split whatever assets are available in the buyer’s bankruptcy estate.

While the basic intent of a ROT clause—that the seller retains the title until payment is complete—is fairly clear, in practice enforcing these stipulations can become tricky. For example, certain raw materials that a manufacturer purchases on credit from the supplier may be mixed with other materials, in which case the original item is no longer salvageable. An illustration of that would be a commercial bakery that purchases sugar as an ingredient for its products. There’s no way for the seller to reclaim that sugar once it has been combined with other ingredients.

Difficulties can also arise when the purchaser resells the items before it paid the supplier. This can happen when a retailer sells apparel that it acquired on credit, for instance. In this case, the seller’s ability to reclaim the products is greatly diminished, if not eliminated because the goods have changed hands through a legal transaction.

Components of a ROT Clause

A typical ROT clause will include language that gives legal ownership of the goods to the seller until the buyer has paid for them in full. Often the clauses will also state that the seller has a right to enter the buyer’s premises to retake possession of the items; otherwise, doing so could constitute trespassing.

In addition to these basic provisions, a ROT clause will sometimes include specific requirements about how the buyer is to store the goods in order to make repossession easier. This may include requirements about marking the goods in a way that makes clear who the seller is and storing the items in a separate location. The clause may also grant the seller access to inspections of the storage facility in order to make sure they are kept in accordance with the contract’s requirements. 

ROT clauses will often have verbiage that forces the buyer to assume risks of damage or theft once the goods are delivered. In addition, the seller will often include a requirement that the buyer insure the goods upon delivery, often with a proviso that the seller approves the insurance company providing the coverage.

Treatment in Different Countries

ROT clauses fall under the umbrella of property law, and as such their validity in the courts depends largely on local laws. In the United States, the Uniform Commercial Code (UCC), which regulates commerce in all 50 states, largely supports the ability of sellers to include ROT clauses in purchase contracts.

In order to be upheld, however, the seller must provide notice to the buyer’s other creditors that it has a security interest in the property covered by the clause. To do this, the seller must file a financing statement with the appropriate secretary of state office. This can be either in the state where the property is located or where the buyer is incorporated.

ROT clauses are also fairly common in Europe, where they’re often referred to as “Romalpa clauses,” after a famous court case in 1976. However, countries within the European Union have not fully harmonized their property laws and some jurisdictions look on such clauses more favorably than others.

In the United Kingdom, the Sale of Goods Act 1979 upheld the right of sellers to withhold the title on goods sold as long as the sales contract contained clear language about the transfer of ownership. However, the ROT clause may be deemed invalid by the courts if, for example, the buyer is in administration (similar to a Chapter 11 bankruptcy in the U.S.) or the goods in question are perishable.