“Commercial Leases: Trade Fixtures vs. Building Fixtures – A Trap for Unwary Landlords, Tenants, and Creditors” by John L. Waite III
Generally, where personal property is attached to realty and its removal would cause damage to the realty, the item becomes part of the realty and is commonly known as a “fixture”, which cannot be subsequently removed from the realty. And in those cases where the personal property is owned by someone other than the owner of the realty, the fixture’s ownership transfers to the real property owner. Courts define “fixture” as an “article of the nature of personal property which has been so annexed to the realty that it is regarded as a part of the land and partakes of the legal incidents of the freehold and belongs to the person owning the land.” See State v.Wally Hutter Oil Co., 467 S.W.2d 279, 281 (Mo.App. 1971).
The importance of this issue in the context of a commercial lease agreement is very critical, as it can determine whether a tenant who purchases and subsequently attaches personal property to leased premises is entitled to remove the personal property once the lease term expires. Normally, fixtures involving a commercial tenant and the tenant’s business are accepted from the general rule just discussed. Such fixtures are known as “trade” fixtures and ownership is not lost simply because the item is attached to the leased premises. See Matz v. Miami Club Rest., 127 S.W.2d 738, 741 (Mo. App. 1939)(where the court stated that trade fixtures are “those articles or appliances which are in some manner or to some degree annexed to or connected with the realty by the tenant for the purpose of carrying on the particular trade or business for which the premises were demised to [tenant] by the landlord, but which, notwithstanding their annexation or connection, do not become part of the realty, remaining instead the property or chattel of the tenant, removable by [tenant] before the expiration of the term of [the lease]…”).This issue can also impact the creditor who loans money to the tenant upon an assumption that the creditor is entitled to a lien upon the personal property (a/k/a trade fixture).
However, compare the “trade fixture” caveat to the circumstance where the realty is built for a particular purpose and fixtures are annexed into the realty that involves the same purpose. In that instance, the fixture becomes part of the realty and is known as a “building fixture”. In other words, where an article is “so placed as to make the building itself peculiarly adapted and more usable for the type of business, then it is not removable”, the article is a “building fixture” and may not be removed. See Francis v. Richardson, 978 S.W.2d 70, 75 (Mo.App. 1998). See also Runny Meade Estates, Inc. v. Datapage Tech. Intl., Inc., 926 S.W.2d 167, 171 (Mo.App. 1996) involving a publishing company that made certain improvements to its leased property, including a raised computer floor, three computer room air conditioner units, a card access system, a computer room electronic door, a darkroom revolving door, darkroom fixtures, and a bar code, which were all found to be “trade fixtures” and not “building fixtures” by the Appellate Court after it found that the lease agreement evidenced the publishing company’s intent to maintain ownership of “trade fixtures and related furnishings and equipment.”
An example of a “building fixture” is found in Stockton v. Tester, 273 S.W.2d 783 (Mo.App. 1954) where a building was built for the purpose of operating a meat locker plant and subsequently leased to tenants who managed such a business. To finance the plant’s operation, the tenants borrowed money from the plaintiff, who took a security interest in certain collateral, including 5 insulated cold storage doors and some beef tracking equipment installed in the building. Upon the tenant’s default under the loan agreement, the plaintiff sought to enforce its lien against the collateral while the defendant/landlord argued that the items were “building fixtures” and therefore could not be removed and was not subject to plaintiff ’s lien.
The Stockton Court held that the storage doors were “building fixtures” based upon evidence that they were “commercially constructed insulated doors which were made and installed as units, complete with frame” and that “[e]ach door in its frame was fitted in the space left for it in the wall or partition and was bolted to the wall by three- to four-inch leg screws, and the only thing necessary to complete the installation was to put caulking compound in any cracks which might develop in the fitting of the door.” Furthermore, the Court noted that the doors’ “very nature, when coupled with the nature and design of the building and the purposes in so doing, made it apparent that they were annexed to the realty in order to make the structure itself more usable and adapted for a certain type of business.” Id. at 785 and 787-88.
Had the Stockton creditor/plaintiff known the difference between a “trade” fixture and a “building” fixture, it could have taken steps to prevent this outcome by involving the landlord/defendant as a party to its agreement with the tenant/borrower.
When preparing a commercial lease agreement or drafting a loan agreement, involving fixtures as collateral; landlords, tenants, and creditors alike are encouraged to employ legal counsel to ensure that their interests are properly protected. The last thing anyone wants is for a jury or court to decide their fate. Instead, with a little foresight and an appropriate agreement; the landlord, tenant, and/or creditor can minimize those litigation costs that arise when parties do not agree upon, or even understand, their respective legal rights and obligations. that a landlord should not be allowed to contract for an acceleration clause so long as the clause is in essence a liquidated damage provision and not a penalty as defined under Missouri law.