A fairly sizable client whom I've done a few jobs for over the past several years has recently contacted me for a new job. We have never had a contract for any of the work I've done for them (I'm a freelance designer). In his most recent email, he said:

"By the way, I am requiring that all files in their native form belong to [my company] and are to be delivered to me upon completion of the project. The files must not be password protected and are to be in their 'collected-for-output' form before payment will be made. I consider what we pay for to be the intellectual property of [my company]."

Aside from the fact that this is a little insulting (considering I've held nothing hostage, have been perfectly civil, and complied with every request I've ever received from any client I've had, including providing original working files), I understand that this is not standard practice... Most designers, it seems, do not hand over copyrights or intellectual rights to a design. But I don't feel that it's worth losing a fairly good client over something that may make him feel I'm somehow taking advantage of him. (The designs I do for them are mostly advertisements, flyers, small brochures, etc.)

What would you do? What do you recommend?