Fixturing Ownership Rights in Commercial Leasehold Improvements

It is an invitation to a lawsuit when a lease agreement does not clearly articulate your express understanding of what will and will not be removed from the premises at the conclusion of the lease. If you aren’t certain how your intentions should be expressed, then an attorney should be consulted. Disputes over what is removable by the tenant can be high-stakes in nature, because the materials subject to removal can be valuable. A few years ago, one of our clients had to deal with the “midnight” removal of booths and an entire stainless steel kitchen line in his restaurant building; the defaulting tenant used wrecking bars and an acetylene torch to wreak havoc throughout the building. The impact of this pillaging was devastating to the landlord’s re-let value of the premises—and it was avoidable. Another client of our firm engaged in a dispute over whether a telephone switch was removable; this single, specialized piece of equipment was worth tens of thousands of dollars. Consider the cost of copper in recent years. It’s no wonder that some tenants and landlords have heated conversations about the removal of copper piping or other copper-based products from premises—just the scrap value of such materials is significant.

Recently, another client became embroiled in an argument over removal of improvements from a Laundromat that had thousands of dollars in specialized improvements, some of which were interior while others penetrated the roof of the building housing the premises. Our client’s concerns led to the generation of a memorandum that gave this advice, which, although admittedly limited to the circumstances of the premises, gives some idea of the fact-intensity of any analysis of what property is removable at the conclusion of the term, when the lease indenture itself isn’t sufficiently clear on that subject:

Client:

There are three primary reasons why SMITHCO cannot remove any such leasehold improvements [generally identified below in 1. and 3.-6.] from the premises. First, they never belonged to the current tenant; second, the lease text doesn’t allow any removal of the sort I am advised is contemplated by Mr. Smith; and third, the contemplated removal is contrary to the intention of the original builder-owner of the premises. The items Mr. Smith claims to want to take out therefore are not, by the very terms of the lease, trade fixtures.

The lease does not contemplate that leasehold improvements can be removed at the end of the lease term; that is explicitly the parties’ agreement in Article 5B.—that leasehold improvements paid for by Landlord or installed by Tenant shall belong to Landlord at the termination of the lease. Indeed, the lease is very clear that the Tenant’s Property (so defined in Article 10A.) only includes equipment, furniture, inventory, signs and “movable trade fixtures,” and these clearly are defined by illustration (counters, shelving and mirrors) as things that readily slide away from a wall or are removed easily from limited moorings like screws, without the need to use cutting torches or heavy tools. Basically, movable trade fixtures are unattached to the premises in any but a placement or balance-maintenance manner (see, Mark A. Senn, Commercial Real Estate Leases, §22.4 (2003 Supplement, page 22-20), which recites the deliberately limiting scope of removable personal property included within the expression “movable trade fixtures.”)

Your building was intentionally designed by its original owner for two tenants, with the primary one being a Laundromat, and that owner, like the present Landlord, intended to leave it that way for future operations. The plumbing and electrical lines in the premises, therefore, were not installed for the convenience of one Tenant or for a temporary purpose that might argue in favor of their removal by Tenant at the end of the lease term. Here are some illustrations from the photographs you shared with me of the interior of the Laundromat that demonstrate the unmistakable intention of the Landlord that all items installed by it were intended to be leasehold improvements instead of fixtures:

1. The building owner installed 2” X 4” framing around a series of 24” X 24” boxes that house the five “bulkheads”; these bulkheads are connected to the premises ceiling by the framing and are bolted to the floor.
2. The wall height in the premises was designed specifically to house industrial-sized dryers.
3. The dryer venting pipes to the roof actually penetrate the roof structure to the outside; so the roof structure was designed to accommodate large venting pipes.
4. The water and waste water piping is specially designed to connect to the bulkheads; any piping removed becomes junk, without market value other than for scrap.
5. The electrical conduit is joined to the electrical panels, so if conduit is severed from any panel, that panel will be compromised, out of compliance with City building code.
6. The power sources are oversized, meaning that more amperage is available to the premises than would be needed for usual retail sales of goods and services. Here, there is no intention by the Landlord to modify the use of the building, which will be re-let to a Laundromat operation.

You advised me that the rent on the premises is substantially higher than it is at other, comparable Laundromat facilities around the valley—and the reason for that is that the original Landlord intended to recoup the investment in super-infrastructure for this particular use over time. So the intention of the Landlord, evidenced by the rent reserved, was to create a permanent facility for commercial laundry operations with permanent leasehold improvements—and to recoup over time the cost of those permanent improvements. And for nearly 50 years in Arizona, the intention of the parties as respects the use and adaptability of personal property has been the main emphasis in determining which party has a claim of ownership in the fixtures, see Voight v. Ott, 86 Ariz. 128, 341 P.2d 923 (1959).

As for the issue of whether electrical wiring is a non-removable fixture, in 35A Am. Jur. 2d, Fixtures, at §109 (p. 921), the author asserts this proposition: “Electrical wiring is ordinarily considered a part of the realty, irrespective of the other circumstances.” That seems logical from the perspective that the wiring is adaptable to future uses—even non-Laundromat uses—of the premises. That same perspective is suggested by our court of appeals, that in 2005 ruled that wall to wall carpeting is a fixture, in Hayden Business Center Condominiums Association v. Pegasus Development Corporation, 209 Ariz. 511, 105 P.3d 157 (App. 2005). So while intention of the parties is the paramount factor in determining the character of the improvement item, the adaptability of the application and the extent of its physical attachment remain consequential.

The Landlord’s position should be that the Tenant is free to remove the following items from the premises only at the time of its move-out and thereafter: stack dryers; washer extractors; washing machines; water heaters; folding tables, vending and coin changing machines and chairs. And that’s it. Everything else in the premises are leasehold improvements or immovable fixtures; therefore, no wiring or plumbing pipes or fixtures of any nature—including the bulkheads—are to be removed. [End]

It isn’t that difficult to articulate what the tenant can remove from the premises at the conclusion of the lease term; and the parties can agree that any personal property added after lease commencement to the premises (except inventory and equipment mounted on wheels or casters) that has a value in excess of some threshold amount will be deemed by the parties, in the absence of some written agreement to the contrary, to be a permanent accession to the premises—and therefore becomes the property of the landlord from the moment it is installed. One of the disadvantages of printed form leases, of course, is that the provisions about leasehold improvements versus fixtures tend to be scant or, at the opposite extreme, so overbearing as to endanger enforcement against a tenant by a landlord. So, landlords and tenants should discuss what will be added by the tenant to the premises in advance of personal property installation, and what the tenant desires to remove at lease expiration. And, thereby, avoid a donnybrook.

-MNW