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“FIXTURES” IN COMMERCIAL LEASES
What
you Have to Leave Behind at the End of the Lease
INTRODUCTION:
At the end of the
typical commercial lease, the typical tenant is required to leave the
premises in “broom swept” condition, reasonable wear and tear
excepted, but most leases (and the law in California) also have various
requirements as to ownership and removal of “fixtures”
installed on the premises by the tenant.
What are those? In lay terms,
if the tenant makes “permanent” alteration in the premises
such alterations must be removed and if anything is
“attached” to the premises, it belongs to the landlord and
must stay if the landlord wants it.
The most famous of the cases involved a Merry Go
Round. The amusement park tenant had installed it in a huge
“hole” that had to be dug to fit the machinery and left,
taking the Merry Go Round and leaving the hole. The landlord wanted the
Merry Go Round back, stating it had been “fixed” to the
ground and thus now belonged to the landlord. At the least, the landlord
wanted the hole filled and left in the same condition as when the tenant
arrived. The tenant argued that the hole actually improved the premises
for the next tenant and should not have to be filled in.
Then the lawyers took over…
Every landlord and every tenant should know intimately
the law of fixtures both to understand what occurs if the lease is silent
on the subject and to know what clauses to insist upon. This article
shall discuss the basic law and make some suggested provisions as to
fixtures…so that when the reader installs that two hundred thousand
dollar counter for the bar, the reader will not be surprised to discover
that the bar now belongs to the landlord!
BASIC LAW
A fixture
is a thing, originally personal property, but later affixed or annexed to
realty so that it is now considered real property. “A thing is
deemed to be affixed to land when it is attached to it by roots, as in
the case of trees, vines or shrubs; or imbedded in it, as in the case of
walls; or permanently resting upon it, as in the case of buildings; or
permanently attached to what is thus permanent, as by means of cement,
plaster, nails, bolts or screws.” California Civil Code Section 660.)
More modern approaches by the Courts have a three fold
test to determine if something has become a fixture, thus property of the
landlord: The courts look to (1) physical annexation; (2) adaptation to
use with real property; and (3) intention to annex it to real property.
And of the three, intention has
become increasingly the major test. Cornell V Sennses, (1971) 18 C.A. 3d. 126
Typical examples of property that have, in California, and subject to various
intentions, been held as fixtures are:
1. Refrigeration systems.
2. Presses of a newspaper business.
3. Garage.
4. Pump on concrete foundation.
5. Sewer line embedded in soil and not removable
without serous damage to the entire sewer line.
6. Computer hardware (!). See Bank of America v Los Angeles (1964) 224 C.A.2d 108.
7. Drapes and wall to wall carpeting.
On the contrary, property that have been held Not to
have become fixtures are:
1. A wall bed easily removable.
2. An easily removable kitchen unit (stove, sink,
refrigerator).
3. Easily movable industrial equipment.
4. A pipe organ that could be removed without damaging
walls.
Again, the three fold test above was used in
determining the various factors above.
And, as discussed below, should there be a written lease; the
criteria may largely be determined by the terms of the lease.
Usually, in the absence of agreement between the
Parties, the Courts will simply examine the type of personal property
attached, the reason and intentions of the parties, and the damage to the
property and personal property that would otherwise occur if removed.
LEASES AND AGREEMENTS AND THEIR EFFECT ON
FIXTURE DOCTRINE
Parties may and do agree that articles affixed to realty
shall nevertheless remain personal property and such an agreement,
whether in a lease or separate document, is binding upon them and against
third parties with notice of the
agreement. CC 1013; Oroville-Wyandotte
Irr. Distr. V Ford (1941) 47 C.A. 2d, 531.
The vital aspect of the above holding to note is the
requirement of notice to third parties. If a third party (such as the
buyer of the real property or lease) is without notice, the agreement is
ineffective and a fixture can still be regarded as real property. This is
particularly important to note since encumbrances (such as Banks and
Savings and Loans…or any holder of a Deed of Trust) may be able to
declare a fixture against the lessee if they loan money secured with a
deed of trust and were not on notice as to agreements as to fixtures
between the Lessor and lessee of the land. Oakland Bank of Savings v
California Pressed Brick Co.
(1920) 183 C. 295.
And note that where a Lessee with the right to remove
fixtures defaults and the Lessor reenters the property, rights under the
agreement to remove fixtures are forfeited and neither the Lessee nor the
Lessees’ chattel mortgagee may remove the fixtures. Rinaldi v Goller (1957) 48 C.2d
276.
CALIFORNIA’S STATUTORY SCHEME OF PROTECTION: THE
“REMOVAL STATUTE”
The Legislature perceived that the above common law
scheme often worked injustices so, while keeping the basic law intact,
enacted legislation to mitigate to some extent the law on fixtures. The
law is found at California Civil Code Section 1013.
The law provides the following alterations to the
standard doctrine:
1. Any person who, “acting in good faith and
erroneously believing because of a mistake either of law or fact that he
has a right to do so, affixes improvements to the land of another”
may remove them and the “successors in interest” have the
same rights. CC 1013.5 (a)
2. However, the right of removal is conditioned upon,
“…payment, as their interests shall appear, to the owner of
the land and any other person having any interest therein who acquired
such interest for…all of their damages proximately resulting from
affixing and removal of such improvements.” CC 1015.5(a)
3. But any lien holder on the property (mortgagor or
mechanics lien) must give written consent to the removal. CC 1013.5(d).
4. And absent agreement of all the parties above as to
all elements, including the payment of damages, an action can be brought
by the person seeking to remove the fixtures and in any such action of
the owner of the land (only) is entitled to its costs and reasonable
attorney’s fees to be fixed by the Court. CC 1013.5 (b).
LANDLORD TENANT
SPECIAL HOLDINGS
Further, even under common law in California, the particular relationship of
landlord- tenant has allowed exceptions to the traditional fixture
doctrine in two circumstances:
1. First, where there is an agreement permitting
removal (usually found in a lease.)
2. And where the fixtures are added for the purpose of
a “trade, manufacture, ornament or domestic use” unless they
have been so affixed as to “become an integral part of the
premises.” CC 1019; Alden v Mayfield (1912) 163 C. 793. Obviously
it is a question of fact as to what this means but courts have held plate
glass and marble attached to a building front to have become fixtures; a
paint spray booth installed in a service station became a fixture. On the
other hand, booths and bars that are simply placed on the floor of a
restaurant site are not normally fixtures unless they are somehow
“built into” the premises, e.g. walls and floors are altered
around them. And even if found to
be so affixed, an agreement allowing removal will supersede this
doctrine.
MECHANICS LIENS
AND FIXTURES
Traditionally, mechanics liens
only attached to real property but in unusual circumstances the liens may
also attach to fixtures on the property. Thus, air conditioning units or
removable kitchen units have been allowed to be removed despite a mechanics
liens but the machinery for a gasoline service station were not. The
court, in considering whether a uniquely shaped carpet might be removed
commented, “it was a question of fact whether this was a fixture
within the meaning of the mechanic’s lien law…” Shelly
v Kofka (1951) 107 C.A. 2d 827.
CONCLUSION
Clearly the correct way to avoid this entire issue is
an appropriate lease agreement with clear provisions relating to what is
a fixture and what happens to fixtures and any good attorney can suggest
appropriate clauses. See our article Real Property II: Subleases
and Leases (Commercial) on that general topic, but be sure
to seek legal counsel as well.
But the ramifications are so significant that this
particular issue should be given far greater attention than many property
owners understand. For instance, the Merry Go Round? Well, the tenant
kept the Merry Go Round but had to fill the hole after paying much money
in attorney’s fees fighting about it.
And an even more interesting case involved the Queen
Mary, the famous vessel “permanently installed” on the
waterfront at its site at Pier J as a tourist attraction. A rock dike
enclosed the vessel; a system had been established to protect the
underwater hull so it need not be ever moved to dry dock, and water,
steam sewage disposal, electricity, and communications had been
permanently installed along with a large parking facility.
But it was a ship that could sail the seven seas with
only a little extra work done to once again make it sea worthy.
Fixture? Well, at 67 C. A. 3d 933 you can find the
answer…
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