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Ownership of Personal Property: Removal and Abandonment on Lease Termination
By Robert J. Krapf
Any discussion of the relative rights of landlords and tenants at lease termination in improvements, trade fixtures, equipment and other personal property inevitably begins with an analysis of the law of fixtures. This analysis is necessary because the law treats improvements and fixtures differently from trade fixtures and a tenant's remaining personal property.
Right of Removal
Fixtures are sometimes referred to as improvements, which are usually, although not always, fixtures. The law of fixtures is a wonderfully complicated topic that harkens to the earliest days of English common law. Whether property is a fixture will largely determine whether it belongs to and can be removed by the tenant or belongs to the landlord and must stay with the leased premises. That determination starts with the rule that quicquid plantatur solo, solo cedit, or "all things next to realty become part of it." Would that it were that simple.
Under common law, a "fixture" is an article that was originally a chattel but is by reason of annexation to land regarded as part of the land itself, having the character of realty and, ordinarily, belonging to the landowner. Herbert Thorndike Tiffany, 2 The Law of Real Property 606 (3d ed. 1975) (Tiffany). Whether an item of personal property becomes a fixture depends on several elements. A leading case, Warrington v. Hignutt, 31 A.2d 480 (Del. 1943), identifies the following factors for determining whether a chattel installed on real estate becomes a fixture or remains a chattel: (1) the intention of the party making the annexation, which is the paramount consideration; (2) whether the item can be removed without substantial damage to the realty; and (3) whether the item can be removed without substantial damage to the item itself. The second and third factors also bear on the intention of the installing party. For example, overhead lights that a tenant has installed might be stock lights that were not specifically designed for the leased premises and that can be removed with minimal injury to the realty and in a manner that permits them to be used elsewhere. Installation of these lights with brackets, rather than by mounting them into the ceiling or by some other more permanent method, might show an intent that the lights are to remain personal property. Similarly, courts have found as fixtures carpeting and paneling cut to the irregular shape of the demised premises and fence posts installed in concrete. In the Warrington case, a stove was held not to be a fixture when it was fastened to the building using small clamps and was easily removed.
Trade fixtures are items of property that a tenant uses in the conduct of its business and that remain personal property, even though they have the other characteristics of fixtures. Thus, trade fixtures, although fixtures, are removable. Removability is not, however, an essential element in determining whether property is a trade fixture rather than a fixture or personal property. Michael Rikon, The Law of Trade Fixtures, 26 Real Est. L.J. 161 (1997).
Because the law of fixtures and trade fixtures turns on intent, what is important is the parties' expressed intention as contained in the lease. A tenant may remove fixtures if they are trade fixtures or if the removal can be accomplished without substantial injury to the landlord's property. In the latter case, the ease of removal shows the parties' original intention that the improvement was not a fixture.
In certain situations, an improvement cannot be removed. Examples are when the tenant's installation is in substitution for property already in place and owned by the landlord (that is, the tenant cannot leave the leased premises in worse condition than when the tenant took possession); or when the lease requires the tenant to make certain improvements (i.e., the tenant's obligation to make improvements is consideration for the lease). Tiffany at 621.
Of course, after a lease expires, the tenant no longer has a right to remove the fixtures. If the tenant wishes to retain the right to remove trade fixtures after the lease expires, that right must be included in the lease. A sample provision is as follows:
It is specifically agreed that any and all fixtures, buildings, machinery and improvements erected or installed on the Leased Premises during the term of this Lease may and shall be removed by Lessee within _____ days after the termination of this Lease.
See 8A Am. Jur. Legal Forms 2d § 119:16 (1998).
A tenant has no affirmative duty to remove improvements, provided that the improvements were made in a manner permitted by the lease. A tenant, however, does have the duty to remove its personal property. Milton R. Friedman, 2 Friedman on Leases § 18.1 (4th ed. 1997) (Friedman); 49 Am. Jur. 2d Landlord & Tenant § 846 (1995). Accordingly, if the landlord wants the tenant to remove improvements before the lease expires, the lease must expressly contain this affirmative duty.
An example of a provision in a commercial lease currently in widespread use in Delaware that illustrates these points is the following:
Tenant agrees that neither it nor anyone claiming under it will make any installations, alterations, additions or improvements to or on the Demised Premises, except only the installation of fixtures necessary for the conduct of its business, without the prior written approval of Landlord. All installations, alterations, additions and improvements made to or on the Demised Premises, whether made by Landlord, Tenant or any other person (except only signs and movable trade fixtures installed in the Demised Premises before or during the term of this Lease at the cost of Tenant or any person claiming under Tenant) shall be deemed part of the Demised Premises and on the expiration or other termination of the term of this Lease shall be surrendered with the Demised Premises as a part thereof without disturbance, molestation or injury. Signs and movable trade fixtures shall not be deemed part of the Demised Premises and may be removed by Tenant at any time or times during the term of this Lease or on the termination of the term of this Lease. If, however, Tenant shall then be in default in the performance or observance of any of the agreements or conditions in this Lease contained on its part to be performed or observed, such signs and trade fixtures as Landlord shall designate shall become the property of Landlord and may not be removed.
The phrase "movable trade fixtures" narrows the definition of trade fixtures by excluding those that may not be movable. All of the improvements will remain, which may not be in the best interests of the landlord. The landlord may need to demolish and remove improvements to relet the space to a replacement tenant. From the landlord's standpoint, a better approach is always to reserve the flexibility of requiring the tenant to remove or to leave the improvements at the end of the lease term.
Abandonment of Property
The characterization of property as a fixture, trade fixture or personal property will also determine what happens to the property on lease termination. Absent express language in the lease, personal property remains the property of the tenant, whereas fixtures (and, in most jurisdictions, trade fixtures) are deemed to have been abandoned by the tenant if it does not remove them before lease termination. Rinaldi v. Goller, 309 P.2d 451 (Cal. 1957); Wolfen v. Clinical Data, Inc., 19 Cal. Rptr. 2d 684 (Cal. Ct. App. 1993); Modica v. Capece, 592 N.Y.S.2d 775 (N.Y. App. Div. 1993); 51C C.J.S. Landlord & Tenant § 397 (1968). A few jurisdictions allow the tenant a reasonable time after lease termination to remove fixtures, but the tenant will be liable for damages in trespass arising from the removal. Ilderton Oil Co. v. Riggs, 186 S.E.2d 691 (N.C. Ct. App. 1972); Towne v. Sautter, 326 N.W.2d 694 (N.D. 1982); Adams Outdoor Advertising L.P. v. Long, 483 S.E.2d 224 (Va. 1997); Friedman at § 24.4. At some point, the tenant will be considered to have abandoned the personal property, but there is no bright line test for when abandonment occurs. Moreover, the landlord can be held liable to the tenant for wrongfully disposing of the tenant's personal property. Mason v. Schumacher, 439 N.W.2d 61 (Neb. 1989).
As a general rule, a tenant does not forfeit or lose title to its personal property by failing to remove it from the leased premises after termination of the lease, even if that failure continues for a reasonable time after the lease ends. Bednar v. Marino, 646 A.2d 573 (Pa. Super. Ct. 1994); 52A C.J.S. Landlord & Tenant § 790 (1968). Abandonment at common law requires the intent to relinquish a known right or interest. 1 C.J.S. Abandonment § 4 (1985). It is therefore important for the landlord to investigate the ownership and lien status of the tenant's personal property and trade fixtures before asserting claims against them and certainly before claiming abandonment by the tenant. This investigation will include, at a minimum, a search of the relevant financing statement records.
A recent Pennsylvania case provides a useful analysis of these issues, particularly as they involve Articles 2 and 9 of the UCC. In Hoyt v. Christoforou, 692 A.2d 217 (Pa. Super. Ct. 1997), the landlord of a shopping center restaurant recovered possession of the restaurant space from the defaulting assignee of the original tenant. The original tenant had sold the restaurant equipment to the assignee on an installment basis, retaining, but not perfecting, a security interest in equipment. After terminating the lease, the landlord refused to allow the original tenant to enter the premises to recover her claimed equipment and relet the premises to a new restaurant operator. The landlord also purported to sell the equipment to this new tenant by bill of sale, retaining a security interest and filing a financing statement. When the original tenant pursued her debt claim against her assignee, the landlord and the new tenant intervened.
The landlord claimed, first, that the terms of the lease allowed it to retain property that the tenant had not removed from the premises on termination and, second, that the original tenant's assignee abandoned the equipment. The new tenant based its claim to the property on the argument that it was a good faith purchaser for value whose interest was superior to that of the holder of an unperfected security interest (i.e., the original tenant).
On appeal, the court found that the lease provision on which the landlord relied did not apply to the restaurant equipment. The court found that high chairs, cash registers, ice chests, fax machines, broilers, step ladders and so forth were not "fixtures" as the Pennsylvania UCC defines that term. Next, the court dismissed the abandonment argument. The court held that a landlord cannot infer abandonment of the equipment by the tenant's cessation of business and failure to pay rent or by the tenant's subsequent failure to remove the equipment once the landlord terminates the lease. The court noted that the landlord made little effort to ascertain the status of the equipment and simply padlocked the premises, which constituted an unlawful conversion of the tenant's property. The court observed that the landlord had lawful remedies available and could have obtained a landlord's lien or executed a distraint remedy under applicable Pennsylvania law. Either remedy would have allowed an exercise of jurisdiction over the equipment. The landlord compounded its error by proceeding to sell the equipment to the new tenant, even though he had actual notice of the original tenant's ownership claims. Finally, the court held that the new tenant could not have the status of a good faith purchaser for value, because the seller did not have title to the goods. Under UCC § 2-403, a purchaser of goods can only acquire the title held by the transferor. A good faith purchaser from a converter acquires no interest in the goods bought. Consequently, as the holder of an unperfected security interest, the original tenant had a superior interest to a converter and the third-party purchaser of converted goods.
A lesson from Hoyt is that the landlord could have obtained control of the equipment by following lawful remedies (e.g., exercising the landlord's lien) and would have obtained priority over the original tenant's unperfected security interest. Instead, it chose to assert self-help remedies that proved to be unlawful. In a similar case, the Minnesota Supreme Court held that if the landlord knows of an arrangement by the tenant to sell trade fixtures to an assignee that will carry on the same business, the original tenant does not abandon trade fixtures remaining on the premises at lease termination. Central Chrysler Plymouth, Inc. v. Holt, 226 N.W.2d 177 (Minn. 1978). Finally, a creditor or other person that derives its claims to the property from the tenant will have the same rights of removal as the tenant and must exercise those rights within the same period. See 35 Am. Jur. 2d Fixtures § 49 (1967). But see Gibson v. Exchange Nat. Bank, 42 P.2d 511 (Okla. 1935).
Landlord's Rights to Deal with Property
A corollary concept is the landlord's right to deal with personal property remaining in the premises. Because property that a tenant leaves may interfere with the landlord's use of the leased premises, the landlord has the right under the common law to recover from the tenant the cost of removing and storing that property. Restatement (Second) of Property § 12.3 (1977); 49 Am. Jur. 2d Landlord & Tenant § 239 (1995). The question then arises of how long the landlord must store the personal property before it can claim that the tenant has abandoned the property, allowing the landlord to dispose of the property once and for all. Courts have generally found that abandonment will be deemed to have occurred if the personal property has not been removed within a reasonable time after the lease termination. Id. at § 237. Trade fixtures that are not removed after the lease term ends and the tenant has surrendered the leased premises are deemed abandoned and become the property of the landlord. See Rinaldi, 309 P.2d 451; Wolfen, 19 Cal. Rptr. 2d 684; Modica, 592 N.Y.S.2d 775; L.S. Tellier, Time Within Which Tenant's Right to Remove Trade Fixtures Must Be Exercised, 6 A.L.R. 2d 322 (1949). In other words, trade fixtures are treated like fixtures and are deemed abandoned, absent contractual provisions to the contrary.
Some states have adopted statutory limitations whereby, after a certain number of days, the tenant is deemed to have abandoned its personal property. An example comes from the Delaware Landlord-Tenant Code:
If, at the time of the execution of the writ of possession, the tenant fails to remove tenant's property, the landlord shall have the right to and may immediately remove and store such property for a period of seven days, at tenant's expense, unless the property is a manufactured home and the rental agreement is subject to Chapter 70 of this title, in which case the manufactured home must be stored for a period of 30 days. If, at the end of such period, the tenant has failed to claim said property and to reimburse the landlord for the expense of removal and storage in a reasonable amount, such property and possessions shall be deemed abandoned and may be disposed of by the landlord without further notice or obligation to the tenant. Nothing in this subsection shall be construed to prevent the landlord from suing for both rent and possession at the same hearing.
25 Del. Code Ann. § 5715(e). Some states have also adopted variations of the Uniform Residential Landlord Act, which have similar provisions.
These statutes often have limitations. As the Delaware example illustrates, the statutory provision may relate only to property remaining after the tenant's dispossession under a possessory proceeding and might not apply if the tenant simply disappears and fails to pay rent. The statutory remedies may also have constitutional defects. In Mombro v. Louis Capano & Sons, 526 F. Supp. 1237 (D. Del. 1981), the court pursued a lengthy analysis of the statutory predecessor to the Delaware abandonment statute and found that it was likely to be deficient on due process grounds as a prehearing deprivation. Nevertheless, the court found that it could resolve the dispute without reaching the constitutionality of the statute, leaving the constitutional question open.
For these reasons, careful landlords will want to draft clear language in the lease relating to the disposition of the tenant's property on lease termination. As the Hoyt case shows, it is important to provide for disposition of all types of tenant property and not simply improvements or even trade fixtures. Of course, abandonment can cut both ways. For example, in Kulkowitz v. 122-124 Duane Realty Corp., 583 N.Y.S.2d 388 (N.Y. App. Div. 1992), a landlord was liable for injuries caused by a fallen sign that a former tenant had left on the premises. Such contractual dispositions of property are generally enforceable. 51C C.J.S., Landlord & Tenant § 317(a) (1968). An interesting argument (not accepted by the court) that such a provision is an unlawful penalty under a liquidated damages analysis can be found in Kurc v. Herren, 396 S.E.2d 62 (Ga. Ct. App. 1990).
Visual Artists Rights Act of 1990
Landlords should be aware of the Visual Artists Rights Act of 1990 (VARA), which grants rights to artists to prevent the removal or destruction of certain works of art incorporated into buildings. 17 U.S.C. § 106A. Even though art that a tenant installs may be a fixture and, on lease termination, become the landlord's property, the landlord's right to dispose of that property may be qualified if the removal will destroy or mutilate the work. See Carter v. Helmsley-Spear, Inc., 861 F. Supp. 303 (S.D.N.Y. 1994), rev'd on other grounds, 71 F.3d 77 (2d Cir. 1995), cert. denied, 116 S. Ct. 1824 (1996); Carter v. Helmsley-Spear, Inc., 852 F. Supp. 228 (S.D.N.Y. 1994); Neil Boorstyn, 1 Boorstyn on Copyrights
§ 5.07[b] (1998); Melville B. Nimmer & David Nimmer, 3 Nimmer on Copyrights § 8D.06[C] (1998).
VARA applies to a "work of visual art," which is defined as:
1. a painting, drawing, print, or sculpture, existing in a single copy, in a limited edition of 200 copies or fewer that are signed and consecutively numbered by the author, or, in the case of a sculpture, in multiple cast, carved, or fabricated sculptures of 200 or fewer that are consecutively numbered by the author and bear the signature or other identifying mark of the author; or
2. a still photographic image produced for exhibition purposes only, existing in a single copy that is signed by the author, or in a limited edition of 200 copies or fewer that are signed and consecutively numbered by the author.
17 U.S.C. § 101. Certain pictorial materials are not included in this definition of a "work of visual art" such as posters, motion pictures, technical drawings, database, merchandising or advertising items or, importantly, any "work made for hire."
The statute provides that the author of a work of visual art has certain rights. These include the right:
(A) to prevent any intentional distortion, mutilation, or other modification of that work which would be prejudicial to his or her honor or reputation, and any intentional distortion, mutilation, or modification of that work is a violation of that right, and
(B) to prevent any destruction of a work of recognized stature, and any intentional or grossly negligent destruction of that work is a violation of that right.
Id at § 106A(a)(3).
There have been a few cases dealing with substantive claims under VARA for alleged damage to works of visual art. In Martin v. City of Indianapolis, 982 F. Supp. 625 (S.D. Ind. 1997), the artist who had created an outdoor sculpture for the City of Indianapolis was entitled to damages for the complete destruction of that work when the city demolished the sculpture. A New York court has held, however, that an artist is not entitled to relief under VARA where the work of art has been illegally placed on property. English v. BFC&R East 11th Street LLC, No. 97 Civ. 7446 (HB), 1997 U.S. Dist. LEXIS 19137 (S.D.N.Y Dec. 3, 1997).
Perhaps one of the most significant cases has been the Carter v. Helmsley-Spear, Inc. case cited above. As part of the renovations of an office building, the landlord had removed certain lobby sculptures that the landlord felt were out of keeping with the desired look of the renovated office building. The artists brought an action under VARA to enjoin the landlord from removing the sculptures. The trial court held that the sculptures were works of visual art protected by VARA and that the artists were entitled to an injunction for their lifetimes. The Second Circuit, however, reversed the lower court and held that the sculptures were "work for hire" and exempt from VARA.
The rights of the author of a work of visual art can waive these rights to attribution and integrity under VARA. For example, a landlord that secures a work of visual art for a lobby space could obtain a waiver. A waiver for this purpose must be express, in writing, specifically identify the work and specifically identify the uses to which the waiver applies. 17 U.S.C. § 106A(e)(1).
The fate of equipment, improvements and other property on lease termination will depend on the character of that property under applicable law. Fixtures are only removable to the extent permitted by the lease and will automatically belong to the landlord on lease termination. Trade fixtures remain removable by the tenant, except to the extent otherwise provided under the lease terms, but are deemed to have been surrendered to the landlord if the tenant does not remove them before the termination of the lease. Unless the tenant has agreed to limit its rights under the lease, personal property always remains removable by the tenant, survives the termination of the lease, remains the tenant's property and is recoverable by the tenant from the leased premises, even after the lease has terminated.
Robert J. Krapf is a director and officer of Richards, Layton & Finger, P.A. in Wilmington, Delaware. He is a member of the Real Property
Division's Condition of Premises (K-1) Committee and is Chair of the Real Property Division's Land Use Regulation (D-1) Committee.