Specify Items as ‘Fixtures’ to Avoid Tenant's Removing Them at Lease's End

If your lease is like many we have seen, it requires a tenant to remove its “trade fixtures” from the space when the lease ends, but leave behind any “fixtures” (also known as “nontrade fixtures”). A trade fixture is the tenant's personal property that it installs in its space to conduct its trade or business but intends to take away at the end of the lease, says Milwaukee attorney Nathaniel A. Hoffman. Also, the tenant should be able to remove the trade fixture without causing great damage to the space or to the item itself.

But a nontrade fixture is typically a permanent improvement that is uniquely adapted—and attached—to the space, can't be removed without causing great damage to the space or the item, and is considered your property, he adds.

Your lease may have a big loophole if it does not specify which furnishings, machines, pieces of equipment, additions, or other items of personal property are nontrade fixtures that the tenant must leave in its space. As a result, you could end up in a dispute with the tenant over whether something is a nontrade fixture when the time comes for the tenant to return its space to you.

For example, Hoffman has seen tenants claim that lighting fixtures, a supplemental HVAC system, and a liquor bar built into a restaurant space were trade fixtures that they were allowed to remove at the lease's end. But the owners argued that those were nontrade fixtures that should have stayed in the space. Or the tenant might take matters into its own hands and simply remove an item that you consider to be a nontrade fixture and that would have enhanced the space's value.

Hoffman is currently bracing for a potential fixtures dispute between a tenant-client that owns a bar, and the owner of the building in which the bar is located. His client is selling all of its assets in the space, including furniture, equipment, and trade fixtures, to another entity. His client's lease does not specify which items in the space are nontrade fixtures.

Thus, his client and the owner could end up arguing over whether certain fixtures are part of his client's assets or are nontrade fixtures, he says.

Massachusetts Owner Gets Burned

This loophole burned a Massachusetts owner. Its lease said that a tenant had to get the owner's consent if it or its subtenant wanted to install a “structure” (nontrade fixture) in its space. The tenant sublet to a bank, which, without the owner's consent, installed an automatic teller machine (ATM) kiosk in the space's parking lot. The owner claimed that the tenant violated its lease by letting the subtenant install a structure (the ATM kiosk) without the owner's consent. The tenant argued that the ATM kiosk was a “trade fixture,” which didn't require the owner's consent.

A Massachusetts appeals court ruled that the ATM kiosk was a trade fixture. The term “trade fixture” was not defined in the lease. The court, therefore, created a definition of a trade fixture and then reasoned that the ATM kiosk met that definition [Chapman v. Katz]. The owner has appealed this ruling.

How to Plug Loophole

To avoid trade fixture/nontrade fixture disputes over items in the tenant's space, specify in the lease which items are nontrade fixtures, says Hoffman. For example, if you consider an ATM, supplemental HVAC system, and lighting fixtures to be nontrade fixtures, list those as examples of “nontrade fixtures” in your lease's surrender clause, he advises. That will prevent the tenant from arguing that those items are trade fixtures and trying to remove them when the lease ends.

To plug this loophole, make sure your lease's surrender clause includes language like the italicized version below, says Hoffman:

Model Lease Language

All installations, additions, decorations, hardware, nontrade fixtures (including, but not limited to, [insert items, e.g., the ATM, the supplemental HVAC system, and lighting fixtures]), and improvements, except movable furniture and equipment belonging to Tenant, in or upon the Premises, whether placed there by Tenant or Landlord, shall be Landlord's property and shall remain upon the Premises, all without compensation, allowance, or credit to Tenant.

***

Practical Pointer: As a further protection, consider listing in the surrender clause those controversial items that you consider to be trade fixtures, so that the tenant will not argue that they are nontrade fixtures and try to leave them behind in its space when the lease ends, adds Hoffman.

• Chapman v. Katz: 844 N.E.2d 270 (Mass. Ct. App. 2006).

CLLI Source

Nathaniel A. Hoffman, Esq.: Member, Whyte Hirschboeck Dudek S.C., 555 E. Wells St., Ste. 1900, Milwaukee, WI 53202; (414) 978-5634; nhoffman@whdlaw.com.