In the commercial leasing world there remains much contention between the classification of fixtures and trade fixtures, and who, as between landlord and tenant, owns what.
So, what’s the difference? Simply put, a fixture is a thing which becomes part of the property when it permanently attaches to the land. Think doors and lights. Fixtures usually belong to the owner of the property. On the other hand, a trade fixture is an item installed on leased property by the tenant to carry out the tenant’s business. Think signs and free-standing machinery. Trade fixtures usually belong to the tenant and may be removed by the tenant at the end of the lease.
What’s all the fuss about, you may ask. As outlined in a recent Michigan court of appeals case, a dispute regarding ownership may arise when the landlord installs the item on the land for the tenant’s business.[1] In this case, the landlord, who owned the leased property in a shopping center, installed a reception desk and color bar for the tenant’s business, a beauty salon. In the lease, the landlord agreed to install these items at their own expense but stipulated that at the end of the lease, “any additions or alterations of [the premise], except trade fixtures, shall … become part of the realty and [belong] to the Landlord.”[2] At the expiration of the lease, the tenant removed the reception desk and color bar from the leased property.
As such, the question becomes: are these items trade fixtures such that the tenant was permitted to remove the items from the premise, or are the items fixtures such that they belong to the landlord as part of the land and should not have been removed by the tenant?
Using a combination of contract law and real estate law, the court determined that the reception desk and color bar were fixtures attached to the premise and not trade fixtures. The distinction came through interpretation of what the landlord commited to building out for ht tenant through the “Landlord’s Work” and the exhibit attached to the lease which included renovations building the reception desk and color bar. Therefore, the items belonged to the landlord and the tenant was not entitled to remove them upon the expiration of the lease. Contract law has long given effect to the plain and ordinary meaning of the words of an unambiguous contract, as in this particular case, which clearly identified the additions of the reception desk and color bar as part of Landlord’s Work, they were found belonging to the landlord.
Moreover, real estate law has defined a fixture as “something having a possible existence apart from realty, but which may, by annexation, be assimilated into realty.”[3] Does this mean sticking paper mâché onto the wall makes the paper mâché a fixture and therefore part of the realty/land? Not quite. Under Michigan law, an item is a fixture if:
- It can be affixed to the realty/land;
- Its adaptation or application is appropriate for the use or purpose of the realty/land; and
- It was intended to be a permanently attached to the realty/land.[4]
With this in mind, the lease negotiation process should be sure to correctly address and identify both tenant’s and landlord’s understandings with respect to fixtures and trade fixtures, and who owns what at the end of the lease.
[1] Cassidy Rae Studio, LLC v. Bocks, 345984, 2019 WL 7206114 (Mich. App. Dec. 26, 2019).
[2] Id. at 1.
[3] Id. at 3.
[4] Fane v. Detroit Library Com’n, 465 Mich. 68, 631 N.W.2d 678 (2001); Pierce v. City of Lansing, 265 Mich. App. 174, 694 N.W.2d 65 (2005); Ottaco, Inc. v. Gauze, 226 Mich. App. 646, 574 N.W.2d 393 (1997).
