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Leasehold Improvements vs. Tenant Trade Fixtures

By April 8, 2014January 21st, 2022Leases

You are a dentist. You have a lease. The lease says something about “leasehold improvements” or “improvements”, who owns them, who can remove them and at what point in time, and who has to pay in the event of any damage that was caused by the removal. Leasehold improvements are sometimes thought of as fixtures that attach to the premises in some immovable way – like light fixtures, floors, walls, doors, ceilings, etc.   Typically, a tenant will not own leasehold improvements or improvements once they’ve been installed or attached to the premises.

Now, leases also generally talk about “trade fixtures” or “tenant trade fixtures”. These are typically the tenant’s equipment, goods and chattels which are more movable than leaseholds and which the tenant can generally deal with as they see fit (absent anything to the contrary in the lease).

So what’s the big deal you ask, about “leasehold improvements” and “tenant trade fixtures”? Well, here’s the all-important question: if the lease is not specific about what piece of equipment, furniture or fixture is a leasehold improvement vs. a tenant trade fixture, then who owns it, who is liable for repairing/replacing it, and in what circumstances is the Tenant required to remove it and pay for any damages caused in removing it? If a judge or arbitrator is going to make that determination, how do they decide these things? Let’s look at some relevant legal principles and cases, shall we?

In the case of Argles v. McMath, [1895] OJ No 102, the Ontario High Court of Justice (Queen’s Bench Division) laid down some important legal principles concerning the distinction between “fixtures” (modern-day “leasehold improvements”, “improvements” or “fixtures”) and “tenant fixtures” or “tenant trade fixtures”. The Ontario High Court of Justice found that the term “fixtures” included only irremovable fixtures, which are things as may be affixed (e.g. doors and windows) or placed on (e.g. rail fences) the freehold. And if purchased and placed affixed or placed on the freehold by the Tenant, these things become the property of the Landlord (in which case the Tenant ceases to have any property). HOWEVER, these so-called true “fixtures” doesn’t include “removable fixtures” (modern-day “tenant trade fixtures” or “tenant fixtures”), which are things as may be affixed to freehold for the purposes of trade or of domestic convenience or ornament, which remains the property of the Tenant. And the Tenant also owns those things that are affixed to the freehold for merely a temporary purpose, or for the more complete enjoyment and use of them as chattels. So far so good? We’ve got some basic legal principles under our belt… now, let’s move on to the next case…

In the case of Club 7 Ltd v. EPK Holdings Ltd, [1993] NJ No 363, the Newfoundland Supreme Court – Trial Division cited some additional relevant legal principles in determining whether something is a “fixture” which goes with the premises (i.e. owned by the landlord ) vs. a “tenant trade fixture” which is owned by the Tenant and which can be removed by the Tenant:

96 The next question is when will a chattel be considered to be “fixed to the freehold” so as to fall within the rule, as distinct from remaining a chattel and thus subject to the ownership rights of the person introducing it into the premises. In terms of deciding when, as between a landlord and tenant, an item becomes a fixture and no longer a chattel per se, the learned authors of Williams and Rhodes, op cit cites the decision of the Ontario Court of Appeal in Stack v. T Eaton Co (1902), 4 OLR 355 positing five rules for the analysis and determination of this question. As set out at p 13-12 of the text, these rules are expressed as follows:

 “(1) That articles not otherwise attached to the land than by their own weight are not to be considered as part of the land, unless the circumstances are such as shown that they were intended to be part of the land.

(2) That articles affixed to the land even slightly are to be considered part of the land unless the circumstances are as  such as to show that they were intended to continue chattels.

(3) That the circumstances necessary to be shown to alter the prima facie character of the articles are circumstances which show the degree of annexation and object of such annexation, which are patent to all to see.

(4) That the intention of the person affixing the article to the soil is material only so far as it can be presumed from the degree and object of the annexation.

(5) That, even in the case of tenants’ fixtures put in for the purposes of trade, they form part of the freehold with the right, however, to the tenant, as between him and his landlord, to bring them back to the state of chattels again by severing them from the soil, and that they pass by a conveyance of the land as part of it, subject to this right of the tenant.”

Let’s look over some of these principles, shall we? First, things that are attached to land simply by their own weight are not (in and of themselves) considered to be part of the land (i.e. they’re not necessarily fixtures). Second, if something is even slightly attached to the land, then it would generally be considered part of the land (i.e. they’re fixtures). Third, the parties can modify these rules by having an agreement (i.e. a lease). Fourth, it’s important to know whether an item can be easily severed and removed without substantial injury to itself or to the realty following that process. Fifth, it should be determined whether it is the intention of the parties to create a permanent and substantial improvement to the realty or only a transient or temporary purpose (or one designed to render the chattle itself more usable as a chattel instead of benefiting the use of the realty); you’ll note this is from the Argles v. McMath case noted above. The final point above deals with the tenant bringing in their own trade fixtures. These are two categories of trade fixtures: (1) “true fixtures” which attach to the realty which lose irrevocably their character as chattels and are non-recoverable by the tenant and (2) “tenant’s fixtures” or “trade fixtures” which are personal chattels annexed to the freehold by the tenant during the term, either for the purposes of their trade or for mere ornament and convenience, and which he has a right to sever and remove during the term, in the absence of any express stipulation or local custom to the contrary. To be considered a tenant’s trade fixture, it must have been brought in by the tenant (not the landlord) and must also be capable of removal without resulting in irreparable damage to the remaining freehold or to the fixture itself. Remember: this is all subject to the express terms of the lease.

In the case of Sheferaw v. Mutual Trust Co, [1999] OJ No 464, the Ontario Court of Justice had to determine whether former commercial tenants of a building should be compensated by a new Landlord who appropriated their exhaust hood and carbon dioxide fire suppression system. The former commercial tenants had an agreement with the previous Landlord to purchase his interest in a restaurant’s chattels and fixtures (which included the hood and suppression system).   When the new Landlord took over and bought the building, it insisted that it was buying the restaurant’s chattels and fixtures. The problem for the new Landlord, however, was that the agreement of purchase and sale provided that the purchase price didn’t include any chattels and the new landlord was an “astute businessman” who should have known better. So who owned the exhaust hood and carbon dioxide fire suppression system? The Ontario Court of Justice concluded that those things belonged to the former tenant and, as such, the new landlord owed them money for appropriating their goods. Here’s how the Ontario Court of Justice came to that conclusion:

THE LAW

25 [The new landlord] made much of the fact that the exhaust hood and ductwork were attached to the building and that their removal would cause damage to the building. Other items such as the steam table were attached to the building through the electrical wiring needed for their operation. Mr. Zwiebel cited Royal Bank v. Maple Ridge Farmers Market (1995), 34 CBR (3d) 270 (BC Sup Ct) for the proposition that any item which is attached even minimally (i.e. it cannot simply be unplugged) is a fixture. Although this is true for the purpose of distinguishing between chattels and fixtures, the Royal Bank case explicitly recognized that tenants’ fixtures are treated differently at law. Thus at pages 275 and 276 of that decision it is stated that a tenant who purchases a machine and bolts it to the floor would have the right to remove the machine during the currency of the tenancy, as a tenant’s fixture. The sole qualification seems to be that it must be possible to remove the item without causing irreparable damage to the remaining freehold or to the fixture itself. In this regard see Argles v. McMath (1896), 23 OAR 44 (Ont CA) and Club 7 Ltd et al. v. EPK Holdings Ltd et al.(1993), 115 Nfld & PEI R 271 (Nfld SC) at pp 291 and 292.

26 In this case there is no evidence that irreparable harm would have been done to the building by the removal of any of the tenants’ chattels or fixtures. Wayne Cahill testified that it would involve one day’s labour to dismantle the hood and ductwork. The hole in the outside wall through which the exhaust duct passed could be closed up.

27 There is nothing in the evidence to suggest that other large items like the steam table and the bar could not be removed from the building, by dismantling them if necessary. I infer from the fact that they were brought onto the premises, that they were capable of being removed for use elsewhere.

 28 Even if the fixtures claimed to be tenant’s fixtures were brought into the premises by [the former landlord], the agreement between [the previous landlord] and [the former tenant] makes them the property of [the former tenant]. It is open, therefore, to [the former tenant] to claim them as tenant’s fixtures or trade fixtures: Club 7 Ltd, supra, at p 292 (para 107).

In the case of Clemmer Steelcraft Technologies Inc v. Bangor Metals Corp, [2009] OJ No 3080, the Ontario Court of Appeal had to deal with a lease that said that “All… Leasehold Improvements and fixtures upon the Demised Premises and which in any manner are or shall be attached to the floors, walls, ceiling or roof of the Demised Premises shall, upon the Commencement Date, become the sole property of the Landlord….”. At issue was some of the tenant’s equipment – namely, a spray booth and racking. FYI, the tenant has been in the business of manufacturing and assembling large component pieces of heavy equipment. The tenant wanted the Court of Appeal to acknowledge that it (not the Landlord) owned the equipment and that it could enter the premises and remove it. But the Court of Appeal read the above provision in the lease and concluded that that equipment was actually owned by the Landlord! So what’s the moral of the story? Read the lease carefully because it can actually supersede the common law (i.e. legal principles and judge-made law that we’ve been reviewing up until now).

In the case of BDN Mechanical Ltd v. British Columbia, [2006] BCJ No 83, the BC Supreme Court had to determine whether garbage compactors were real property or “fixtures” once installed (instead of personal property).   The BC Supreme Court looked to the common law to make that determination and wrote the following:

17 The leading case in British Columbia on the issue of when chattels are sufficiently affixed to real property to constitute fixtures at common law is LaSalle Recreations Ltd v. Canadian Camdex Investments Ltd et al. (1969), 4 DLR (3d) 549 (BCCA). In LaSalle at p 554, McFarlane JA adopted a four-part test that was set out in Stack v. T Eaton Co (1902), 4 OLR 335:

 I take it to be settled law: —

(1) That articles not otherwise attached to the land than by their own weight are not to be considered as part of the land, unless the circumstances are such as shew that they were intended to be part of the land.

(2) That articles affixed to the land even slightly are to be considered part of the land unless the circumstances are such as to shew that they were intended to continue chattels.

(3) That the circumstances necessary to be shewn to alter the prima facie character of the articles are circumstances which shew the degree of annexation and object of such annexation, which are patent to all to see.

(4) That the intention of the person affixing the article to the soil is material only so far as it can be presumed from the degree and object of the annexation.

 18 A review of the authorities that predate LaSalle, as well as those that apply it, reveals that the focus of the inquiry is on whether the goods in question are attached to the premises for the better use of the goods as goods, or to enhance the value of the premises, or to improve the usefulness of the premises: Haggert v. Town of Brampton (1897), 28 SCR 174 (SCC); Fess Oil Burners Ltd v. Mutual Investments Ltd, [1932] OR 203 (Ont CA); Turismo Industries Ltd et al. v. Kovacs et al. (1976), 72 DLR (3d) 710 (BCCA); Heathron Developments Ltd v. Kemp Concrete Products, [1998] BCJ No 2292 (BCCA).

 19 However, there have clearly been difficulties when it comes to applying the LaSalle test. These difficulties were considered by Maczko J in Royal Bank of Canada v. Maple Ridge Farmers Market Ltd, [1995] BCJ No 1696 (BCSC). At para 2 he states: “Simply put, the test requires first determining whether an item is slightly attached’ and therefore presumed to be a fixture; and second, if it is slightly attached, to consider whether the presumption is defeated by the intended use of the item, ascertained by reference to the degree and object of the annexation.” At para 3 he states that “the application of the test is uneven at best.”

 20 In light of the apparent difficulties in applying the test, Maczko J proposed six rules that he hoped would prevent parties from having to come to Court for a determination on a case-by-case basis:

 1. Any item which is unattached to the property, except by its own weight, and can be removed without damage or alterations to the fixtures or land that would need repair, is a chattel.

2. Any item which is plugged in and can be removed without any damage or alteration is a chattel.

3. Any item which is attached even minimally (i.e. it cannot simply be unplugged) is a fixture.

4. If a piece of equipment is attached to a structure, a part of which could be removed but which would be useless without the attached part, then the entire piece of equipment is a fixture. In other words, the item will be a fixture if it loses its essential character because it is of no use unless attached to a permanent and substantial improvement to the premises of which it formed part. The converse is also true. If an item can be detached without damage or alteration, and if the item retains its essential character without the attached part, then it will be a chattel.

5. Where an item is determined to be a fixture, it may nevertheless be removed if it can be shown that it is a tenant’s fixture. A tenant’s fixture may be removed from the premise during the currency of the tenancy providing that the tenant leaves the premises in exactly the same condition as he or she received them.

6. In very exceptional circumstances not covered by these rules the Court should have resort to the purpose test. For example, a mobile home may be resting on the land by its own weight but it may be clearly established that it was intended to be a fixture. These circumstances should only arise rarely and in relation to very large or expensive items.

21 I do not doubt that these rules result in a clearer and simpler application of the law. These rules have been followed by this Court in Pemberton Holmes Ltd v. Ulaszonek, [1996] BCJ No 1938 (BCSC) and in Kaverit Steel and Crane Ltd v. British Columbia, [1999] BCJ No 3204 (BCSC). They have also been referred to in Ontario in Phan v. Morris and Doris Realty Ltd, [2000] OJ No 1080 (Ont Sup Ct) and in Sheferaw v. Mutual Trust Co, [1999] OJ No 464 (Ont Ct J (Gen Div)).

22 I recognize the possibility that strict adherence to these rules might lead to a result inconsistent with the LaSalle approach. In particular, rule three suggests that minimal attachment is sufficient to render an item a fixture even if it was clearly intended to remain a chattel. However, the Court of Appeal has not overruled Royal Bank. In my view, rule six provides the Court with sufficient latitude to follow the rules without arriving at a result incongruent with LaSalle.

The BC Supreme Court then applied the law to the facts and concluded that garbage compactors are fixtures at common law:

24 As a preliminary observation, I note that all three types of compactors are attached to some degree to the building they are intended to service and are prima facie, real property. Looking to the object and degree of annexation, it is clear to me that garbage compactors become real property once installed.

 25 Despite the differences between the three compactors and their varying degrees of annexation, they are all installed with the intent to remain permanent fixtures to the premises. The evidence suggests that compactors will generally remain onsite for the duration of their useful lifespan. While affixing the compactors to the premises may improve the functioning of the compactors themselves, the true purpose behind their installation is to improve the usefulness, and to increase the value, of the premises. Compactors serve an ex post function. In other words, businesses do not purchase a compactor, install it on a site, and then build the premises around it. Compactors are installed to increase the efficiency of the premises by facilitating the removal of waste. All of these factors combined lead to the inexorable conclusion that garbage compactors are fixtures at common law [emphasis added].

In the case of Caledonia Service Station Inc. v. Cango Inc., [2011] OJ No 1045, the Ontario Court of Appeal had to figure out who owned and was responsible for underground storage tanks and fuel lines at a Mississauga gas station. One of the fuel lines had leaked and the Tenant simply capped it. When the Tenant terminated the lease, it left behind the capped underground fuel line. The Landlord claimed the storage tanks and fuel line belonged to the Tenant and the Tenant should remove them and pay for any damage caused in the removal. The Landlord lost in the lower Court, so it brought a brand new lawsuit, asking the Court for an order requiring the Tenant to repair the underground storage tank and fuel lines. According to this argument, the lease required the Tenant to repair “improvements”. The Landlord won, so the Tenant appealed. The Court of Appeal sided with the Tenant on the basis that the lease didn’t impose an obligation on the Tenant to repair “trade fixtures”. The lease imposed an obligation on the tenant to repair “improvements”. So the Court of Appeal reviewed the common law (i.e. judge-made law) dealing with “improvements” vs. “trade fixtures” and wrote the following at paragraph 14:

14 This distinction accords with the ordinary meaning of improvements and trade fixtures in the law of real property: improvements refer to things constructed on and attached to the realty that are intended to become part of it; trade fixtures refer to things placed on and connected to the realty but in a way that the connection can be severed, restoring their character as chattels. See Stack v. T Eaton Co (1902), 4 OLR 335 (Div Ct); Fas Gas Oil Ltd v. JH Automotive Ltd (2004), 31 Alta LR (4th) 197 (CA); Beloit Sorel Walmsley, Ltd v. New Brunswick (1976), 71 DLR (3d) 240 (NBCA).

Then the Court of Appeal noted what the lease said. It talked about “improvements” and the tenant’s obligation to repair them. This obligation doesn’t apply to the tenant’s “trade fixtures”. Since “trade fixtures” may be removed by the Tenant, the landlord had no stake in their state of repair; but with “improvements”, because they cannot be removed, they will inevitably become the property of the landlord (thus giving the landlord an interest in ensuring their repair). So based on the common law distinction between “improvements” and “trade fixtures” and in light of the provisions of the lease (which can override the common law), the Court of Appeal held that the underground storage tanks and fuel lines were indeed the tenant’s “trade fixtures” and NOT “improvements” (which is what a lower court in the first case had determined) and therefore the Tenant had no obligation to the Landlord to repair them.

MORAL OF THE STORY: be wear when negotiating leases. The common law – which isn’t always clear cut – may be overridden by the language of the lease.

DMC