Trade Fixtures
Trade fixtures are pieces of property that a tenant affixes to a leased building or land for the purpose of conducting business. An examples of trade fixtures include a display counter, or a piece of equipment that is used specifically for bartending purposes. Even though it was installed by the tenant, trade fixtures must meet certain requirements to be removable. If it does not meet those requirements, then it becomes the property of the owner of the property. To explore this concept, consider the following trade fixtures definition.
Definition of Trade Fixtures
Noun
- Pieces of property that are affixed, by a tenant, to a building or land, for the purpose of conducting business.
Origin
1590-1600 Late Latin fixūra
What are Trade Fixtures
Trade fixtures are pieces of property that are attached to a building or land to enable the tenant to conduct business. For instance, a company that rents a store within a shopping center can set up display counters within that store to display items for sale. This display counter would then serve as one of the many trade fixtures within that store. When the tenant eventually moves out of that location, he can take with him some of the trade fixtures, in addition to his personal property.
Trade fixtures differ from chattel – which is the tenant’s personal, moveable property for two reasons: (1) they are often difficult to remove, and (2) they can be rather valuable. Examples of trade fixtures can include:
- Permanent signs
- Heating or air conditioning units
- Shipping containers
- Structures or installations
- Certain types of equipment, such as those used specifically for bartending, or by restaurants or banks
Sometimes, the only way to determine whether a fixture can be removed is by asking a number of questions, including:
- Who paid for the fixture
- How the fixture was installed
- How it is used during the normal course of business and
- How carefully it is removed – without causing damage to the building – when the tenant eventually moves.
A tenant should therefore always take care to ensure that any property he brings to the business remains a trade fixture, rather than somehow becoming the property of the landlord or property owner.
To do this, the tenant should specify in the commercial lease which fixtures he wants to classify as trade fixtures. The tenant should also specify that he intends to use those fixtures to aid him in conducting his normal course of business on the premises, and that he intends to take them with him when the lease ends.
Difference Between Trade Fixtures and Improvements
States’ definitions regarding the difference between trade fixtures and improvements. The significant difference between trade fixtures and improvements is that improvements are made to the property itself to benefit the tenant and, unlike trade fixtures, cannot easily be removed. For instance, a parking lot or a driveway that is expanded to accommodate more customers is an improvement that is made to benefit the business, not a trade fixture that can be picked up and carted off.
It is also important to establish which features are actually improvements so that they can be protected under the property owner’s insurance policy. It is perhaps easier and less costly to replace a damaged trade fixture than it is to replace a damaged improvement.
For instance, if a display counter is damaged, it could cost hundreds or perhaps thousands of dollars to fix. Whereas, if a parking lot sustains significant damage, it could potentially cost tens of thousands of dollars to repair. It is therefore important for the landlord to establish the property that he should be paying to protect under his policy, and which property is the tenant’s responsibility.
If a feature of the business has become a permanent part of the business, and/or has been specified as an improvement in the lease, then that feature belongs to the landlord, and the tenant cannot remove it. If the tenant decides to remove the improvement anyway, he will be held liable by the landlord or property owner. The owner is then within his right to sue the tenant for the costs involved with replacing the improvement and repairing any damages that may result from its removal.
When Can Trade Fixtures Be Removed
For a tenant to be able to remove a trade fixture, the fixture must satisfy a few requirements:
- The fixture must have been installed by the tenant
- The fixture must be necessary to the tenant’s business
- The fixture must be able to be removed without damaging the property in any way
- The fixture must be removable from the premises within a reasonable amount of time
If the fixture cannot satisfy these three requirements, then ownership of that fixture will transfer to the owner of the property, whether or not it was installed by the tenant. Trade fixtures in commercial leases differ from those in residential leases, in that commercial tenants are sometimes permitted to both install and remove trade fixtures.
Insofar as the “reasonable amount of time” requirement is concerned, the normal rule is that a commercial tenant is required to remove trade fixtures before his tenancy is up. If he has not been provided a reasonable opportunity to do this, then the tenant has a short window after his tenancy terminates to remove the fixtures. There are, however, exceptions to this rule, which differ depending on the state.
Because of the potential liability involved, and the complications that accompany such a feat, it is perhaps within a tenant’s best interests to retain an attorney. The act of removing trade fixtures can become very ugly very quickly, so it helps to have legal guidance so that the tenant can be protected in the event of a dispute over who owns what, and how much damage occurred in the removal.
Trade Fixtures Example Involving a Packaging Machine
An example of a trade fixture case coming before the Supreme Court involved a dispute over a piece of equipment that was located on the premises of a frozen food business. Here, Henry Kermin owned a piece of property in Los Angeles, where he operated his frozen food business for several years. In 1966, Kermin sold the property to David Pick and Sam Mesler, and their wives. On the day of the sale, the buyers also leased the property to two of Kermin’s corporations. Pick and Mesler later formed Bauchet Properties, and transferred the property and the lease to their business.
At the time of the simultaneous sale and lease, one of Kermin’s corporations owned an automatic packaging machine, which was secured to the floor of the frozen food business. As part of the lease, the lessors were permitted to trade in or replace any of the property on the premises during the term of the lease. They were also permitted to remove property upon the termination of their lease, provided the lessors did not go into default.
In December of 1967, one of the corporations – Kermin Frozen Food Co., Inc. – borrowed $10,000 from a man by the name of Malcolm Goldie. A promissory note was created that stated that, in addition to paying Goldie back with 10 percent interest each year, Kermin was also entitled to part ownership of the packaging machine. However, the lessors defaulted on their lease in September of 1969, and the corporations turned over the premises and its contents – which included the packaging machine – to Bauchet Properties the following month.
In November of 1969, Goldie demanded possession of the packaging machine. Pick refused and Goldie sued Pick and Bauchet Properties for ownership. The trial court concluded that the packaging machine was indeed a trade fixture. As such, the machine was held to be personal property, and it was therefore proper to use it as collateral in the security agreement that was made between Goldie and the defendants.
The trial court ruled that Goldie was entitled to possession of the packaging machine, and a judgment was entered. The defendants appealed the case to the Supreme Court of California.
The appeals court ruled that, since the packaging machine was already a part of the premises at the time of sale, and since the corporations had given Goldie a security interest in the machine after the lease was already entered into, then Goldie had no greater right to the machine than did the lessors. Similarly, since the Defendants had lost their right to remove the machine from the premises after defaulting on their lease, Goldie’s rights that were granted to him by his security interest were affected as well.
The appeals court ultimately reversed the trial court’s decision, and remanded the case back to the trial court, directing the court to determine the corporations’ interest in the packaging machine.
Related Legal Terms and Issues
- Default – Failure to fulfill an obligation, or to appear in a court of law when summoned.
- Defendant – A party against whom a lawsuit has been filed in civil court, or who has been accused of, or charged with, a crime or offense.
- Lessor – A person who leases a piece of property to another person; a landlord.
- Promissory Note – A signed document establishing the promise to pay a defined sum of money to someone on or by specific date.
- Tenancy – Possession of a piece of property as a tenant.
