What do we mean when we say something is a “fixture”? The most accurate answer is: “Who knows?” One reason for such uncertainty is that the answer depends on: (a) why you are asking; (b) who you are asking; (c) when you asked the question; and (d) where you were standing when you asked the question. The real reason is that the answer depends on the intent of the parties for whom the answer would be important.
What is not in doubt is that the question’s answer is important, for both leases and mortgages (and for taxation and some other kinds of issues).
Why wait to get to the end of this piece? We’ll give you our conclusion right now. (1) A fixture is what the document says it is; (2) it matters less as to “what” a fixture might be, then as to who gets to keep it, who maintains it, and who has to remove it. So – craft your lease, mortgage, or other agreement such that it answers those questions. In a lease, for example, define the term “Tenant Fixture” and spell out the tenant’s rights and responsibilities as to a “Tenant Fixture.” Not all “Tenant Fixtures” are personal property. Some are personal property for one purpose and not for another. You can define the supplemental air conditioner placed on the roof by the tenant as the tenant’s personal property but, as between the property owner (as mortgagor) and its lender (as mortgagee), that air conditioner is almost certainly going to be part of the real property. The tax assessor will probably see the rooftop unit as taxable real property (assuming the assessment is not solely based on income potential).
We don’t intend to set forth a firm rule usable to definitively determine what is or is not a real property fixture. The furthest we will go is to share some text from Sutton v. Frost, a 1981 decision from the Supreme Judicial Court of Maine. As you read the following excerpts, keep the context in mind – whether a fixture remains a tenant’s property turns on the “intent” behind bringing the fixture to the leased property in the first place. Here we go:
“Where the parties are related as landlord and tenant, the law tends to infer that annexations made by the tenant are intended to be temporary, since it is unlikely that the tenant meant to deprive himself of his property. … This inference is especially strong where the annexation is a trade fixture, i.e., property which the tenant has placed on the rented real estate to advance the business for which the realty is leased. … The value of this rule is its bearing upon the question of intention — it is unlikely that the parties would have intended for the removal of additions where removal would materially damage the remaining estate.”
So, what do we learn from the Maine court? Simply speaking, unless the lease or other “proof” defines each party’s rights in a “possible” fixture, a court will try to read the minds of the landlord and its tenant. In doing so, it will apply “presumptions” that just may not have been in those “minds.”
Let’s look at some stark examples to illustrate the conundrum of “intent.”. You can have two identical steam boilers in a building, each connected to the same source of fuel; each located in the same room; and each serving a network of pipes attached to columns, joists, and so forth. If they are both used to heat the “joint,” they are probably (by default) part of the real property. But, if one was used to furnish low pressure steam to a piece of production equipment, such as a sterilizer, it would probably not be part of the real property; instead, it would probably be seen as personal property. Yes, identical pieces of equipment – opposite results. So, if the tenant installed both, and the lease was silent, that would probably be the result because the “production” boiler was not intended to “add” to the building; it was intended to be part of the tenant’s manufacturing equipment, no matter how well it may be glued to the floor.
Our second example comes from the Tennessee Court of Appeals case of Hubbard v. Hardeman County Bank, 868 S.W.2d 656 (1993). The question involved three buildings and whether they were personal property that a ground tenant could pick up and “take home” or whether they became part of the real property once completed. The buildings were 14 feet wide and 30 or 40 feet long. The trick was that they were “modular” in that they had been completely manufactured as self-contained bank branch buildings, complete with wiring, plumbing, lighting, rest rooms, etc. They sat on footings under their own weight. Utility services, such as for sanitary sewers, were furnished though hook-ups to the land. Were these buildings “personal property”? To Hubbard’s relief, they were. It wasn’t just that you could use a crane to pick up the 60-80,000 pound buildings; it was the tenant’s intent in placing them on the land. It specifically had them designed for removability. Oh yes, there were losers – the party that bought the property from the original landlord, thinking it was getting some buildings, and Hardeman County Bank, the mortgagee. What did the tax assessor think? [We don’t know.]
These examples reveal a big problem with the way most lease and mortgage negotiators think, that being: “once you identify (or define) something as a ‘trade fixture’ or a ‘personal property fixture,’ the resulting rights and obligations flow out of such a designation.” This isn’t true. The law’s general understanding of a trade fixture is that the item is “property which a tenant has placed on rented real estate to advance the business for which the property is leased.” But that doesn’t automatically mean that a tenant can remove its “trade fixtures” if doing so would materially harm the real estate. Basically, the parties need to express their “intent.” Yes, “intent” is what controls. And, the best way to let people know what might have been your “intent,” is to say so right there in the agreement.
Here is a piece of less than useful information, of interest mostly to true Ruminators. The biggest reason there is no accepted agreement, in the abstract, as to what does or does not constitute a “fixture,” is because the answer has changed many times over the course of time. Case law is burdened with historical concepts as to “what people must have intended” to remain a mortgagor’s or a tenant’s property when either of them relinquishes its interest in the real property. More simply put, “it takes forever to learn the rules and once you’ve learned them they change again.” [That’s a corollary to Murphy’s Law.]
How do you deal with this uncertainty? That’s easy – make your own rules. Here’s a checklist in progress:
- Define exactly what items, though attached to the real property, will be treated as the tenant’s own property. Basically, this means – what can the tenant take with it when it leaves. You can call it “Tenant Owned Fixtures.” Remember that if an item isn’t attached at all, like a floor lamp or inventory, no one will be calling it a real property fixture. We’re not concerned with that kind of personal property.
- Of the Tenant Owned Fixtures, write down what the tenant must take with it when it leaves.
- Set the time limit for when the tenant must get its “stuff” out.
- Say that the tenant has the obligation to repair all damage caused by the initial installation, presence or removal of Tenant Owned Fixtures.
- Say that the tenant bears the risk of loss for Tenant Owned Fixtures and that the landlord will not be insuring them.
- If you are the landlord, require your tenant to insure the Tenant Owned Fixtures (if you are concerned that the tenant may not be able to cover the loss and thus be unable to get up and running again after the fire or other peril causes damage).
- Decide, together, what other items the tenant attaches to the real property (“Remaining Fixtures”) must go or stay when the tenant leaves.
- As to any of the Remaining Fixtures that the tenant will be required to remove, say that the tenant has the obligation to repair all damage caused by their initial installation, presence or removal.
- As to Remaining Fixtures, make sure they are included in the landlord’s insurance policies and that the lease requires the landlord to restore them after a fire, etc.