Is there is widespread agreement by Landlords, Tenants, Lenders, Vendors and the Courts as to the meaning of Fixtures (structures or improvements that are the property of the Landlord) and Trade Fixtures (personal property owned by the Tenant) ?
Experience in leasing transactions – and perhaps protracted litigation arising therefrom – has tended to show that the answer is more likely NO than YES. Whether you examine the intent of the contracting parties, the institutions that fund the purchase or even the companies that install these items, there is often disagreement at a fundamental level. This is complicated by the Courts who have their own ways of interpreting both the common law definitions and the meaning intended by the parties.
Hence, when an issue arises concerning ownership, lien rights, repair and removal responsibilities, insurance coverage, taxes or the effect on the value of the real property, the result often resembles this:
The key to determining which items or improvements to a structure fall in to which category is complex and likely deserves a series of separate articles to “untangle” these issues. This post will not attempt to reach that answer, but instead provide some drafting and procedural tips to help avoid becoming embroiled in the cost and chaos of a dispute over Fixtures in, on, under or otherwise attached to a structure.
CAVEAT: There is no silver bullet here. However, careful analysis, communication between the parties and other points described below can significantly reduce the chances of a food fight over that oven hood, walk in freezer, conduit trail, tank, shelving, drop ceiling, and so on and so on….
NEGOTIATION and DRAFTING TIPS:
1. Who are the parties involved?
Landlord and Tenant are the easy answers here; but if Lenders or Vendors are involved on both sides, what happens? Especially if UCCs are filed, this can be crucial. Take the time to find out who is in the room.
2. What is in the building already that Landlord owns and/or controls?
Not always an easy answer especially when Landlord is a new owner or has inherited the Lease through assignment. But, never a bad idea to make sure Landlord’s Lender has provided the most up to date information on the structure and any Improvements already installed or to be completed by Tenant.
3. How is Tenant going to alter the building and what are they bringing into the Premises to operate their business?
This is essential. Most of these details usually get worked out during the Tenant Upfit discussion, but Lenders and Vendors should also be identified. Again, if the Landlord is acquiring the property through purchase, the examination of the assignment of leases should not be left to a cursory review of rent rolls and ledgers. Due diligence often offers an adequate time to determine these issues.
PROCEDURAL TIPS during the Lease Term:
1. As a Landlord, do you know what is being installed in the Premises during Tenant Upfit?
This is often where things may go awry as far as communication between owner and Tenant and associated contractors, Lenders and Vendors. Many leases create a delivery date and a lease commencement date without also establishing a communication conduit between Landlord and Tenant as to what is being placed inside the Premises, installed onto the structure, etc. Language that requires Tenant to report all installations that may constitute more than a movable Trade Fixture is a good way to monitor this process and know the players involved. Property Management can also be invaluable at this time and later in the lease term as the Tenant may continue to alter the Premises during the Term.
2. Does Your Lease Create A Duty for Tenant to Report All Modifications to the Premises and Collateral Obligations to Business Lenders and Vendors?
This portion of the Lease term is where all parties tend to not notice anything unless there is a monetary default or a major event of damage at the Premises. It is understandable as both Landlord and Tenant are concerned with the operations of the business and the profits/payments associated with the same. However, periodic review and discussion of any planned improvements can pay dividends to all parties.
3. Is There a Mechanism in the Lease that Requires Tenant to Be Responsible for the Maintenance and Repairs to Fixtures and Improvements?
Hopefully so, but the Landlord also needs to check periodically to see what is going on in the Premises. Prevention is truly the best medicine.
4. When Tenants are exiting the Premises, is there a means to determine who may have an interest in the Improvements?
Again, this admonition is key to getting ahead of many end of Lease issues. Surely there is no certain means to determine which items installed or placed in the premises are Fixtures or Trade Fixtures before the end of the Lease term or termination. However, an inventory and improvement list can be a tremendous help in resolving these issues before they become contentious. Rarely are matters more maddening than a Landlord taking inventory of an upfitted Premises with a list of companies demanding payment for financing or installing items in the Premises. Here a pinch of prevention will reap great rewards. Who wants to fight with Lendors and Vendors when the Tenant has left or thrown up their arms and given up working with the Landlord?
As stated previously, there is no fullproof means to avoid these matters and disputes relating to Fxtures of all types. Hopefully though implementing lease terms and procedural practices of the type described above can be of great use in reducing the problems that ensue during or after the Lease is terminated.