Commercial Landlords and Tenants in Los Angeles are often times faced with the issue of understanding their rights with respect to fixtures, personal property and the disposition thereof at the end of the lease term, or upon eviction or surrender. There is no bright line rule with respect to fixtures. Moreover, there has been 100 years of case law and precedence dealing with trade fixtures in California, which has shaped and framed the issues that Commercial Landlords and Tenants in Los Angeles must be mindful of when addressing the fixture issue in the commercial lease.
Landlords and Tenants must keep in mind that the law on trade fixtures provides an approach with respect dealing with trade fixtures but not to the exclusion of lease provisions that specifically deal with trade fixtures. As stated below, intent is the most prevalent factor in trade fixture issues. Accordingly, Commercial Landlords and Tenants would be best served with identifying trade fixtures and addressing the disposition of said fixtures at the end of the lease term, with lease provisions whether implemented at the start of the lease term or via lease addendum/amendment during the lease.
California Law regarding Trade Fixtures:
Fixtures are part of the land under California law. See Cal. Civ. Code § 658. A fixture is defined as the following:
“A thing is deemed to be affixed to land when it is attached to it by roots, as in the case of trees, vines, or shrubs; or imbedded in it, as in the case of walls; or permanently resting upon it, as in the case of buildings; or permanently attached to what is thus permanent, as by means of cement, plaster, nails, bolts, or screws; except that for the purposes of sale, emblements, industrial growing crops and things attached to or forming part of the land, which are agreed to be severed before sale or under the contract of sale, shall be treated as goods and be governed by the provisions of the title of this code regulating the sales of goods.”
The statutory test for determining whether an item is a fixture is found in Cal. Civ. Code § 1013:
“When a person affixes his property to the land of another, without an agreement permitting him to remove it, the thing affixed, except as otherwise provided in this chapter, belongs to the owner of the land, unless he chooses to require the former to remove it or the former elects to exercise the right of removal provided for in Section 1013.5 of this chapter.” See Cal. Civ. Code § 1013
Right of removal; payment of damages. When any person, acting in good faith and erroneously believing because of a mistake either of law or fact that he has a right to do so, affixes improvements to the land of another, such person, or his successor in interest, shall have the right to remove such improvements upon payment, as their interests shall appear, to the owner of the land, and any other person having any interest therein who acquired such interest for value after the commencement of the work of improvement and in reliance thereon, of all their damages proximately resulting from the affixing and removal of such improvements. See Cal. Civ. Code 1013.5
See also Cal. Civ. Code § 1025 – “When things belonging to different owners have been united so as to form a single thing, and cannot be separated without injury, the whole belongs to the owner of the thing which forms the principal part; who must, however, reimburse the value of the residue to the other owner, or surrender the whole to him.”
California courts will look at other factors when determining what is a fixture including:
1. The manner in which the item is annexed to the underlying realty. See Rinaldi v. Goller, (1957) 48 Cal.2d 276, 280
2. Its adaptability to the use and purpose for which the realty is used. See Rinaldi v. Goller, (1957) 48 Cal.2d 276, 280
3. The intention of the party annexing the item. See Rinaldi v. Goller, (1957) 48 Cal.2d 276, 280
4. The difficulty of removal of the item. See Pajaro Val. Bank v. Santa Cruz County, (1962) 207 Cal. App. 2d 621, 628
5. The destruction caused to the realty by its removal. See Pajaro Val. Bank v. Santa Cruz County, (1962) 207 Cal. App. 2d 621, 628
6. The relationship between the parties. (Landlord and Tenant) See O.L. Shafter Estate Co. v. Alvord, (1906) 2 Cal. App. 602, 604 (“Whatever the rule may have been at common law the modern decisions, both in this country and in England, in regard to the removal of fixtures, as between landlord and tenant, most liberally construe the right in favor of the tenant.”) Thus, California law seems to suggest strong equities exist in favor of the tenant in preventing the forfeiture of property that he or she has acquired and affixed in order to operate and use the demised premises.
Trade Fixtures Doctrine
When there is no specific agreement between the landlord and the tenant regarding the tenant’s right to remove fixtures affixed to the leased premises, forfeiture of the tenant’s improvements is prevented in some cases by the application of the “trade fixture” doctrine. “A tenant may remove from the demised premises, any time during the continuance of his term anything affixed thereto for purposes of trade, manufacture, ornament, or domestic use, if the removal can be affected without injury to the premises, unless the thing has, by the manner in which it is affixed, become an integral part of the premises. See Cal. Civ. Code § 1019
The tenant cannot remove fixtures and/or improvements in cases where the damage to the premises caused by a fixture’s removal cannot be repaired or money damages would not compensate the landlord for the loss. See Gordon v. Cohn, (1934) 220 Cal. 193, 195-96
A right to remove fixtures annexed to demised premises must be exercised within a limited period of time, or it is lost. See United Pac. Ins. Co. v. CAnn, (1954) 129 Cal. App. 2d 272, 275 (“We may take it as settled in California that a tenant who is given the right to remove fixtures at the end of his occupancy must exercise this right within a reasonable time thereafter.”) If the tenant does not remove the improvements within the appropriate time, any interest in the improvements is forfeited and they become the property of the landlord. Id. at 277. A tenant or other person who wrongfully removes a fixture or other improvement to the premises is liable for damages and may be criminally liable for theft or embezzlement. See Cal. Penal Code §§ 495, 501, 602.
Because the landlord is entitled to possession of the demised premises in a usable condition at the end of the lease term, if the tenant does not have an agreement allowing the removal of fixtures, all fixtures removable by a tenant by operation of law must be removed before the end of the term of the lease. See Cal. Civ. Code § 1019.
The true factor (if any one factor is emphasized) is the intent of the parties with respect to the particular item being deemed a fixture or an item of personal property. See Seatrain Terminals of California, Inc., v. County of Alameda, (1978) 83 Cal. App. 3d 69, 75 (“In resolving whether an article placed on the premises constitutes a fixture or personal property, the aforelisted three elements do not play equal parts. In making the determination in a particular case the element of intent is regarded as a crucial and overriding factor, with the other two criteria being considered only as subsidiary ingredients relevant to the determination of the intent. “) Whether an item has lost its characteristic as personal property and has become a fixture, is a question of fact for the trier of fact. Id. at 79 (“It is, of course, axiomatic that whether the property has lost its character as personalty and has become a fixture is primarily a question of fact to be determined by the trier of fact whose findings must be upheld on appeal where, as here, they are supported by sufficient evidence.”)
If you are a commercial landlord or tenant in Los Angeles and faced with a trade fixture issue, contact one of our Commercial Lease Attorneys in Los Angeles for a free consultation and case evaluation.