What Can A Tenant Take When It Leaves?

Print
Print Friendly, PDF & Email

We’ve traveled this road before, though not very recently. What can a tenant remove from its leased space when it leaves the space? There is some “common law,” modifiable by the terms of a lease. Most leases cover the subject. All should.

We’ll start today by presenting what a landlord asserted its lease said about whether its departing tenant could remove display cabinets, television monitors, and a large outdoor air conditioning unit. Don’t get too excited. The Washington Court of Appeals also didn’t think it answered the question:

Lessee shall not make any alterations, additions or improvements to said Premises without the consent of Lessor in writing first had and obtained, and all alterations, additions and improvements which shall be made at the sole cost and expense of Lessee, and shall become the Premises of the Lessor, and shall remain in and be surrendered with the Premises as a part thereof at the termination of this Lease, without disturbance, molestation or injury.

Observe that, as did the court, it does not speak of “fixtures.” As to “alterations, additions or improvements,” the warring parties had no disagreement about the need to leave them in place. In fact, the tenant had installed an indoor air conditioning unit that could not be easily removed, and its removal would have caused damage to the property (even though repairable). That’s an important “fact,” as readers will discover (or have their existing understanding affirmed) later.

Take note, that the word “improvements” is understood in the limited sense of being “real property” improvements. If a tenant’s owner is well-liked and replaced a prior, curmudgeon-tenant, that might be an improvement, but not one that has to be left behind (even if we didn’t have a Thirteenth Amendment to the U.S. Constitution).

In 2014, we posted our thoughts, a lot of them, about “fixtures.” That blog posting can be seen by clicking: HERE. http://www.retailrealestatelaw.com/archives/2331 In included words a Missouri court used to explain the difference between removable (personal property or trade) fixtures and those that have to stay behind – (real property) fixtures. None of that would have been needed if the word “fixture,” standing alone, didn’t apply to both “kinds.” Today, we’ll be highlighting the words used by a Washington state court when it went about distinguishing between the two types of fixtures. Those words follow below, but first we’ll show you what that same court said about construing a lease’s text (or text in any agreement). It won’t come as a surprise to regular readers. We’ve expounded on the principle many, many times before. So, we won’t do so today; we’ll just let the court’s words hang out there:

In construing a lease, the court’s function is to ascertain and give effect to the intention of the parties as expressed in their agreement.

The agreement must be read and considered as a whole, and if, when so considered, its terms are plain and unambiguous, the intention of the parties will be deduced from the language used.

Technical terms and words of art are given their technical meaning unless the context or a usage which is applicable indicates a different meaning.

But if the provisions of a lease are doubtful in that they are reasonably capable of more than one interpretation, the court will adopt that interpretation which is more favorable to the lessee, particularly when, as here, the lease was drafted by the lessor.

[We’re not so sure the court really meant what it broadly said in the last sentence, but if you are in Washington and it works in your favor – go for it.]

Now, here are the parts about fixtures:

It is well recognized that determining what constitutes a fixture as opposed to personal property is a difficult task, that depends on the particular facts of each case.

Washington courts apply the common law test of fixtures to determine whether a particular item is personal property or real property.

When, however, a landlord and tenant make a lease agreement in which there are stipulations relative to the ownership of chattels which may be placed upon the leased premises by the tenant, the agreement will be enforced regardless of what might be the rights of the parties at common law.

Although in a general sense it can be said that all “fixtures” (as distinguished from “trade fixtures”) become, at least temporarily, part of the real property and therefore improvements, the converse is not true. Not all “improvements” are fixtures.

A “fixture” is a chattel which has been annexed to and has become a part of realty but which retains its separate identity and may be removed and become personalty again

On the other hand, building materials, although chattels which may be affixed to the land, cannot be removed and regain their prior identity. When combined with labor, building materials become “improvements” to real property, irretrievably losing their separate identity.

Separately, the court had these things to say about “trade fixtures”:

A tenant may remove things annexed if a court deems them to be so-called “tenant’s trade fixtures,” a phrase or label that needs to be explained. The word “fixture” usually means something a possessor of land has added that cannot be removed, in other words, a thing that has become part of the land by accession. But “tenant’s trade fixture” has the opposite meaning; a tenant may remove it…. Because of the limited duration of his estate, a leasehold tenant, particularly if the term is short, is more likely than an owner to have a presumed intent that things should be removable at the end of his estate. Therefore, Washington has allowed tenants to remove some improvements and additions that are quite firmly annexed to the land if they were installed to aid the tenant in conducting a business.”

Ruminations finds that analysis interesting, and we agree with it. Almost every definition we have seen concludes that an item firmly attached to real property become part of the real property itself (i.e., it becomes a “real property” fixture), and absent lease language to the contrary, cannot be removed by the tenant even if the tenant installed it in the first place. What makes the Washington court’s understanding different is that it presumes that if an item was attached to the property so it could be used in the tenant’s business, it is presumed to be a removable trade fixture. We’re certain that some litigating tenants would have liked to include a reference to the Washington Court of Appeals’ decision we’re working from.

Now, under any reasonable analysis, there should have been no argument over the display cabinets or the television monitors (used to display a menu of the tenant’s wares). Though they were attached to the real property, removal would have been a simple task. Needed repairs would have been quick and minor. But what about the outdoor air conditioning unit? Was the unit intimately tied to the way the business operated, as were the cabinets and the monitors? Or did it more closely resemble the interior walls constructed by the tenant (and left in place)? More intriguingly, why was there a distinction between that outdoor unit and the air conditioning unit installed inside the leased space by the tenant? After all, the landlord and tenant agreed that the indoor unit had to remain behind.

Here, there was a simple answer. We think the result was correct for this dispute, but we are uncomfortable with how the court supported its finding. Take a look at this:

By contrast, the cabinets, monitors and outdoor air conditioning unit were all removable with a minimum of physical disruption. All of these items were installed for the purpose of enhancing [the tenant’s planned] retail store: glass cabinets would display items available for purchase; the monitors were installed to display a “menu” of available products for customers. The outdoor air conditioning unit had not yet been fully connected to the building, in contrast with the indoor air conditioning unit that [the tenant] had installed and which it left in place. [Underlining by Ruminations.]The cabinets, monitors, and outdoor air conditioning unit were trade fixtures, and as such were not within the scope of the applicable lease provision. [The tenant] was entitled to remove all of them and is entitled to damages for the value of the outdoor air conditioner that it could not remove. Likewise, [the landlord] was not entitled to damages for any of these items’ removal. The judgment must be amended accordingly.

Now, we know. Fortuitously, the outdoor air conditioning unit’s installation was incomplete – the unit was not “affixed” to the real property. Had it been, its status (fate?) would have been just like the tenant-installed indoor unit. Here, the landlord guessed incorrectly when it barred the tenant from removing the outdoor unit. Now, it owns it, having been ordered to pay the tenant for it. Regardless of which way a court “presumes,” “attachment” remains King.

Print

Comments

  1. Randall Gunn says:

    I agree with the legal analysis and thoughts. In addition, while not a legal principle, there is an economic / business factor that should normally be considered. In short, are the improvements that are being left behind by the tenant going to be mites that will enhance the leasability of the space or be of value to the next tenant moving into the space? Are the cabinets going to be used by another tenant or is the next tenant going to have the cost to remove them? Why would the landlord want to have improvements that the next tenant is going to have to demo? I am sure that the case set out facts that would make litigation over these specified improvements financially and prudent from a real estate and business perspective. The legal analysis and emotions whipped to a frenzy that result in litigation don’t always bring into proper consideration what are you really fighting over. I practiced in the transactional and corporate real estate world for over 30 years and I know that my perspective does not fit within the typical litigation mindset. I read the facts for cases, consider the dollars/time/costs, and wonder some times what were you really fighting about.

  2. The easiest solution is to decide up front which items are improvements that stay with the landlord and which are trade fixtures of the tenant. Every commercial lease we use requires the landlord to give approval for all improvements and installations. It is an incredibly easy step to also condition that approval with the requirement to remove or leave the leasehold improvement at the same time.

    I’m always baffled by lawyers that try to envision every conceivable case their tenant may face during the entire lease term and any extensions and attempt to provision for that in advance. We opt to include language to deal with changing conditions on a case-by-case basis, not to be unreasonably delayed, withheld, or conditioned.

    I personally prefer language that encourages business cooperation between a landlord and a tenant over language that assumes we need to start negotiations from a fighting stance.

  3. Larger, sophisticated, creditworthy tenant companies commonly secure trade fixture removal rights that are generally not available to small, unsophisticated, independent operators. And that’s true with respect to every other negotiable element of the lease. It all comes down to knowledge, experience and leverage. And, mistakenly believing that it is a casual agreement, sadly, few independent tenants pay sufficient attention to the lease or avail themselves of legal service by an attorney with that all-too-critical commercial lease negotiation skill set. Instead, they wing it and often end up in contention with the landlord because of their lack of (contract) sophistication. In most cases, more descriptive detail is far better than less.

  4. Jeremy Deeken says:

    I’ve encountered leases allowing the landlord to direct which fixtures (trade or otherwise) are to be removed by the tenant upon lease termination. In line with what Randall states above, this pro-landlord formulation allows consideration of the next user in deciding which fixtures the tenant shall be required/allowed to remove and which shall remain for the benefit of the next user. The Tenant bears the investment risk.

    If the use of the space isn’t going to change between tenants, their is an economic argument for retaining the fixtures in place since removed fixtures incur labor and retrofitting costs or salvage value discounts (if the prior tenant is no longer going to put the removed fixtures to use). In exchange for granting the landlord considerable latitude in determining which fixtures to retain, the tenant could negotiate for a credit equal to the FMV of fixtures retained by the landlord.

Leave a Reply

This site uses Akismet to reduce spam. Learn how your comment data is processed.