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Ohio Court ruling clarifies “fixture vs. trade fixture” in commercial leases

The following is republished, with permission, from The Ohio Real Estate Law Blog. Kohrman Jackson & Krantz PLL is a Cleveland-based law firm representing individuals and companies throughout Northeast Ohio and the United States.

By Connie S. Carr, Senior Counsel, Kohrman Jackson & Krantz PLL

In the context of commercial leasing, what fixtures get removed when a tenant vacates the premises, and what fixtures become part of and remains in the building, can be a contentious issue. For example, a tenant may install certain pieces of machinery and equipment that are bolted in place when installed. If the landlord demanded that the items remain as part of the real estate when the tenant leaves and the tenant disagreed, half the courts would side with the landlord and half would side with the tenant.

An appellate decision was issued this past year in Ohio’s 9th District Court of Appeals that provides some guidance on this issue, at least for those of us located in Ohio’s 9th Appellate District. The case is Perez Bar & Grill vs. Schneider, 2012-Ohio-5820, which was decided on Dec. 10, 2012.

Perez Bar & Grill (“Perez”) was a tenant in a building that Schneider acquired through a foreclosure sale. Perez had various pieces of bar and restaurant equipment and decorations still located in the building, including a wooden bar and back bar, a ventilation hood, sinks and an exterior awning. After the sale, Perez contacted Schneider demanding a return of these items based on their being trade fixtures and did not pass with the real estate when Schneider purchased the building. Schneider refused.

Perez then brought an action against Schneider alleging conversion, among other claims that Perez later dismissed. A conversion is when one party takes action with property that legal belongs to another and is addressed in a civil court action. For example, when someone finds property that belongs to another person and decides to keep it for him or herself, or a property owner cuts down a tree and hauls away the lumber when it’s unclear that property owner had ownership rights over the tree. This differs from theft, which is a criminal act, where the thief intended to steal the property knowing it belonged to another.

Schneider tried to defend the action claiming to be an innocent third party purchaser but the court rejected it. A key factor in rejecting Schneider’s defense was the fact that Perez attempted to retrieve the fixtures from Schneider first without resorting to litigation and Schneider refused to allow it. That action negated any ability of Schneider to be considered “innocent.”

The court cited three elements that must be present to classify an item as a “fixture” to passes with the real estate: (1) actual attachment to the realty, (2) appropriation to the use or purposes of that part of the realty with which it is attached, and (3) the intention of the party who attached the fixture to the realty to make the fixture a permanent attachment. Per prior decisions by the Ohio Supreme Court, these latter two elements are the primary focus when analyzing a fixture to determine whether or not it is fixture or trade fixture.

The general rule that the court followed in its analysis to distinguish a fixture from a trade fixture was whether or not the trade fixture could be removed by the tenant because it was placed there exclusively for business purposes and not with the intention to make them a permanent addition to the real property.

As a result of its analysis, the court upheld the lower court judgment in favor of the tenant, Perez, holding that the items listed above were trade fixtures. There was an A/C unit installed on the roof by Perez that the court held was not a trade fixture, as it served to benefit the entire property and not just the specific needs of Perez’s bar and restaurant business.

As a practice, when negotiating a commercial lease, tenants and landlords are wise to document what will be considered a trade fixture as opposed to a fixture remaining with the property after the lease terminates. It can save a lot of headache and legal fees later. Even if the landlord loses title through foreclosure, and a new property owner takes control, the tenant will be in a better position for arguing later that certain items are trade fixtures and remain the tenant’s property.

Tags: Commercial, legal