Getting a Fix on Fixtures: Watch Your Language with Improvement Clauses in Commercial Leases

(Say What You Mean, Precisely, or a Judge Will Decide What You Meant - #2)

True or False; all things annexed (attached) to real property (realty) become part of it. At early common law, the answer was true. The general rule was that everything attached to the realty was deemed part of the realty, and therefore deemed irremovable. Friedman on Leases, Sec. 24.1 at 1414 (2005). In modern times, as is the case with many “general rules,” the exception (removability) is now more general rule than exception, at least in regard to commercial landlord/tenant law (versus vendor-vendee and mortgagor-mortgagee law). See Id. at 1414.

The right for a tenant to remove items it installs in a landlord’s premises was recognized early on as necessary to encourage trade and manufacturing. Tenants making substantial investment in someone else’s property (especially when the investment is equipment or other items used in the tenant’s trade or business to further such trade or business [“trade fixtures”]) were presumed to do so for their own use and convenience and not for a permanent addition to the landlord’s property. Typically, a tenant’s interest in realty is relatively brief, and it logically follows that the tenant would prefer not to “give its investment away.” The general rule then regarding improvements made to realty in a landlord/tenant situation is that absent lease language to the contrary, a tenant may remove improvements that it has installed - particularly trade fixtures - if this can be done without substantial injury to the landlord’s property. Id. at 1414.

Ohio law seems to follow these general common law concepts and utilizes various definitions and “tests” when the intentions of the parties are not clearly stated in the lease. “Trade fixtures are not fixtures at all, but improvements that a tenant of realty installs to promote the purpose for which the realty is used rather than the realty itself. Trade fixtures, as a general rule, may be removed by the tenant during its lease term.” Jim Skiffey and Associates, Inc. v. Rosenberger, 1991 Ohio App. Lexis 1468 (11th Dist.). In Household Finance Corp. v. The Bank of Ohio, 62 Ohio App. 3d 691, 694 (1989), the Court proffered a three-part test for determination of a tenant improvement as a fixture: “First, to become a fixture it is essential that the chattel in question be annexed to some extent to the realty; second, the chattel must have an appropriate application to the use or purpose to which the realty to which it is attached, is devoted; and third, there must be an actual or apparent intention upon the part of the owner of the chattel in affixing it to the realty to make such chattel a permanent part of such realty.” As to the classification of a tenant improvement item as a fixture or trade fixture, such determination has been held to be a mixed question of law and fact in Ohio depending on the manner of attachment and the intention of the parties. See Canton Financial v. Pritt, 2002 Ohio App. Lexis 2645 (9th Dist.).

The “question of law” part of the determination is easily answered by the general rule, the definitions and the tests established in cases like those cited above. The problem with general rules, however, is they are just that, general, and not applicable to every specific situation. Consequently, the more difficult question to answer is whether the facts of the particular case meet the general rule and its definitions and/or the tests (the “question of fact”).

If you are thinking that the easy answer is just to use the word “fixture” when the Landlord wants to keep the improvement and “trade fixture” when the Tenant wants to remove the same; it is not that easy. The only universal agreement among courts in this area of law is that whether or not the installation is formally labeled a fixture or a trade fixture is unimportant. See Friedman at 1427. Even buildings erected upon a landlord’s land have been deemed removable improvements in some cases. See Friedman, at Section 24.5 at 1442 and cases cited therein. The predominant criterion in determining removability is the clear intentions of the parties and, as you might expect, intentions are apt to be unclear unless they are expressly set forth in a lease that is custom made for the precise situation.

Certainly there are patterns in these cases. For example, with regard to HVAC systems, equipment which is secondary to the existing premises HVAC, and easily removable without substantial damage (e.g. unbolting from roof) has been held to be tenant personal property or “trade fixtures”, based on “presumed intent.” See Cozmyk Enterprises, Inc. v. Robert L. Hoy, 1997 Ohio App. Lexis 2864 (10th Dist.).

On the other hand, HVAC systems which were primary to the realty, intricately integrated into the realty, and removal of same would cause substantial damage have been held to be non-removable fixtures, based on “presumed intent.” See Rose v. Marlowe’s Café, Inc. 1994 Ohio Misc. Lexis 66 (C. Pleas, Hamilton Cty.).

Reliance on case patterns, court definitions and presumed intent is not wise, as a practical matter. There are many more instances between the “case extremes” where courts are misinterpreting intent and landlords and tenants are leaving the courthouse unhappy with a lot of unbudgeted-for costs and expenses. The Landlord in the Cozmyk case presumably thought that the lease provision to the effect that “all fixtures shall become part of the premises and tenant may not remove the same” meant that the building the tenant constructed would stay on the land after the lease was over. Similarly, the tenant in the Rose case presumably thought that the phrase in his lease to the effect that “tenant shall not be prevented from removing its trade fixtures” would allow it to remove its supplemental HVAC equipment that was tied into the existing HVAC distribution system.

The best way to insure improvement items are removable or not removable is to specifically say so in the lease. Adding a simple qualification to a lease improvements clause, comparable to the following example, can easily do the trick: “landlord and tenant hereby intend and agree that the Carrier HVAC compressor and blower equipment installed, or to be installed by tenant on the roof of the Premises shall be [shall not be] removable by tenant at the expiration or earlier termination of this lease, and such Carrier HVAC compressor and blower equipment [shall be considered a fixture and become and remain part of landlord’s premises and property upon installation] [shall be considered a trade fixture, and be and remain the personal property of the tenant].”

The landlord or tenant will particularly want to make sure to specifically characterize improvement items that the courts consistently have held to be fixtures in some cases, and trade fixtures in others, including: HVAC equipment, electric generators and transformers, appliances, lighting fixtures and pre-fab office units.

The moral of this story: “Say what you mean, precisely, or a judge will decide what you meant.”