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Trade Fixtures
By M. Robert
Goldstein and Michael J. Goldstein
While the trial of a trade fixture claim in a condemnation
proceeding usually involves only tow questions -- what has
been condemned (that it, is it real or personal property),
and how much will the claimant be paid -- to the owner of
a business whose premises have been condemned the questions
are just part of a much larger problem. His real problem is
to what extent will he be compelled to be a claimant in those
proceedings. As will be described here, most businessmen cannot
afford to treat their equipment as being taken, no matter
what legal right exists. And when they do, it can be presumed
they have been forced by the most urgent business considerations.
Wall Street Case
When a condemnor seeks to acquire a site for a highway on
urban renewal program, it obviously has little, if any, use
for the buildings or other improvements on the site. If valuation
of the property that it "needed" was all that a
condemnee was to be paid for, the condemnee would not be compensated
for much that was actually "taken".
In Matter of Wall Street (17 Barb 617) a condemnor taking
a then "skyscraper" at Wall and Broad Streets, actually
argued that all it needed was the underlying land; the site;
that it did not need the building, which it said the prior
owner should take with him. It derived its argument from the
proposition invoked when the condemnor's right to take is
challenged; that what is taken and the extent of the taking
is a matter for the condemnor, and not the courts. The court
found the buildings were taken since the condemnor acquired
"real property."
"Real property" as conceived by eighteenth century
legal thinkers embraced not merely the soil, but all that
was affixed to it ("quic quid plantatur solo, solo credit"
2 Kent, Comm. 343). The early English law of trade fixtures
as between grantor and grantee, vendor and vendee, had a somewhat
stricter, more physical test (Van Ness v. Pacard, 2 Pet. 137,143-146)
than had been employed in the majority of American jurisdictions
(those following Teaff v. Hwitt, 1 Ohio St, 511,1853) of which
New York is one (Ford v. Cobb, 20 NY 344, 1859; Potter v.
Cromwell, 40 N.Y. 287, 1869; McCrea v. Central Nat. Bank of
Troy, 66 N.Y. 489, 1876; In re Whitlock Avenue, 278 N.Y. 276,
1938)
Test Differs
Where both the early English and the American views would
agree that at one extreme a building was real property and
at the other a simple chair was personal property their test
for the determinations differed. The early English used the
test of whether an item was or wasn't physically moveable.
American jurisdictions (anticipating modern technology where
anything is moveable) made damage, destruction and loss in
value, upon a removal, the vital considerations - under the
intention of permanence doctrine (Murdock v. Gifford, 18 N.Y.
28, 1859).
In McCrea v. Central National Bank of Troy (supra) the court
stated the rule which has been followed ever since:
"..the mode of annexation is not the controlling test.
The purpose of the annexation and the intent with which it
was made is in such cases the most important considerations.
"The mode of annexation may it is true in the absence
of other proof of intent be controlling. It may be in itself
so inseparable and permanent as to render the article necessarily
a part of the realty and in case of less thorough annexation
the mode of attachment may afford convincing evidence that
the intention was that the attachment should be permanent;
as for instance where the building is constructed expressly
to receive the machine or other articles, and it could not
be removed without material injury to the building or where
the article would be of no value except for use in that particular
building or could not be removed there from without being
destroyed or damaged. These are tests which have been frequently
applied in determining whether the annexation was intended
to be temporary or permanent, but they are not the only ones,
nor it indispensable that any of these conditions should exist.
In the case of Potter v. Cromwell supra, before referred to,
this Court, after a full examination of the numerous authorities
gave its approval to the criterion of a fixture as stated
in Teaff v. Hewitt, 1 Ohio St. 511, viz. The union of three
requisites. First actual annexation to the realty or something
appurtenant thereto. Second application to the use or purpose
to which this part of the realty with which it is connected
is appropriated. Third, the intention of the party making
the annexation to make a permanent accession to the freehold..."
Then citing Walker v. Sherman (20 Wend. 636,1839), the court
sited further:
"This case holds, in respect to machinery, that the
two characteristics of adaptation to the enjoyment of the
realty and annexation to it must occur; but that where the
former characteristic is present, the slightest fastening
will be sufficient to constitute annexation."
The fixture doctrine in a condemnation proceeding is not
a separate body of law (Matter of Mayor, supra). That which
is considered a fixture between vendor-vendee is what the
condemnor takes in a condemnation proceeding, whether the
claimant be the fee owner or the tenant (Matter of City of
New York (Allen St), 256 NY 236, 176 N.E. 377, 1931). In conflicts
as between landlord and tenant, chattel mortgagor and mortgagee,
conditional vendor and vendee effect will largely be given
to the agreement between the parties as to the intention to
make the fixture a permanent accession to the property (Murdock
v. Gifford, supra).
However, in a condemnation proceeding the determination of
whether a fixture is real or personal property, is not considered
as if it were a question arising between landlord and tenant,
chattel mortgagor and mortgagee, conditional vendor and vendee,
but is governed by the rule applicable between grantor and
grantee. That which passes to a vendee on the sale of the
land, the city takes in a condemnation proceeding. The city
does not succeed to the rights of the landlord in his relationship
to the tenant (City of New York [North River Water Front],
118 AD 863, 103 N.Y.S. 908, 1907, aff'd 189 N.Y. 508 Matter
of City of New York [Allen St], supra; Matter of Mayor, 39
A.D. 589, 57 N.Y.S. 657, 1899).
The test in the determination of whether a fixture passes
to a purchaser on a sale, is not the physical force with which
the article is attached to the freehold. That was the common
law rule. By Teaff v Hewitt (supra) the old common law of
immovability has been changes to the rule of intention with
respect to permanency of installation.
Leading Category
The foremost category of condemnation cases with proof of
intention to permanently affix are those where the article
on severance depreciates in value, the intention being that
a reasonable man must have intended to affix his signature
permanently, if to move them meant that they would suffer
a substantial depreciation in value (U.S. v. General Motors,
323 U.S. 373, 1942; Jackson v. State 213 N.Y. 34, 1914; City
of New York, [North River Water Front], supra; City of New
York [North River], 193 N.Y. 117, 1908; City of New York [Seward
Park Houses], 10 A. D. 2d 498, 1960; U.S. A. V Certain Lands,
306 F. 2d 439, CCA 2d, 1962 and in 344 F. 2d 142, 1965; Marraro
v. State, 12 N.Y. 2d 285, 1963; City of Buffalo v. Michael,
16 N.Y. 2d 88, 1965; Rose v. State 24 N.Y. 2d 80,1969; Matter
of City of N.Y. [Fields Baking Co.,] 27 A. D. 2d 539, 2d Dept.,
1967; Matter of City of N.Y. [Tompkins Square Urban Renewal
Project], 27 A.D. 2d 810, 1st Dept. 1967).
However, where an installation is made by the owner of the
fee in his own property to enable him to better use his building
in the conduct of his business the intention of the of the
permanence of the installation is presumed (In re Lincoln
Square, 201 N.Y. S. 2d 443, 452, 24 Misc. 2d 190, 1959, aff'd
and mod. On other grounds 15 A.D. 2d 153, aff'd 12 N.Y. 2d
1066,1963; Matter of Mayor, supra).
The rationale of all of these decisions was really stated
by Judge Cardozo in Jackson v. State, supra, at pp. 35-36):
"We think that the power of the state is not so great,
nor the plight of the citizen so helpless, ‘Condemnation's
is an enforced sale, and the state stands toward the owner
as buyer towards seller. On that basis the rights and duties
of each must be determined. It is intolerable that the state,
after condemning a factory or warehouse, should surrender
to the owner a stock of second hand machinery and in so doing
discharge the full measure of its duty. Severed from the building
such machinery commands only the prices of second hand articles;
attached to a going plant, it may produce an enhancement of
value as great as it did when new. The law gives no sanction
to so obvious an injustice as would result if the owner were
held to forfeit all these elements of value."
State Court Ruling
The Court of Appeals in Marraro v. State (12 N.Y. 2d 105,
1963) reaffirmed the right of a tenant to receive an award
separately determined from that of the freehold (re-dis-affirming
the so called ‘unit rule") on a reproduction cost
less depreciation basis of measuring value. Thus condemnation
proceedings disprove the mathematical axiom that the whole
can be no larger than the sum of its parts, for while the
owner of the fee receives the total value of the real estate,
the tenant (even though he also be owner) receives in addition,
as if a separate estate unrelated to the fee value, a separate
award for the value of his trade fixtures.
So it would appear that the law has evolved to protect the
tenants of property (owner occupants) to make them whole as
to their trade fixtures, thus the umbrella of the trade fixture
doctrine appears wide enough to encompass most tenant installations
which are in some way annexed, if for no other reason than
that almost any installation by a tenant will bring if attempted
to be sold out of a condemned premises (and the doctrine of
depreciation in value showing intention of permanence relates
to the sales price of an installed fixture), but a small fraction
of its going concern value in place.
Yet with all of this, and assuming an assurance of receiving
fair compensation for his fixtures, a tenant, after his plant
has been condemned, cannot just walk out the door leaving
all behind and tell his attorney to prosecute his claim for
everything in the plant and use the proceeds to set up a new
plant. He has other considerations of a practical business
nature which make this a most difficult situation.
Concern with Net
To begin with, if he is going to stay in business and he
wishes to be paid for all of his fixtures he must be concerned
with how much money he will net from proceeding to set up
new premises. Since the measure of damages is new cost as
of the date of the taking, less actual (not book) depreciation,
he knows, unless his machinery is new, that he must receive
less than new cost, the amount he must pay for new replacement
machinery on that date. He must also pay attorney and appraisal
fees and other disbursements of litigation which will reduce
the net proceeds available to him. He also takes the risk
of litigation, not a light consideration.
Since there often is a delay of several years between the
valuation date, the day of taking, and his receipt of money
in this inflationary era he must assume will have to pay higher
prices than that upon which values had been fixed in the condemnation
proceeding, creating a further disparity between what he will
receive and what he must spend for replacement. If to beat
this latter problem he buys replacement machinery as soon
as the property is condemned, unless he has large cash resources,
and most people do not, he will have to borrow money at substantially
higher rates of interest than he will receive from the city
further reducing his net proceeds. (We have clients currently
paying interest rates of per cent on machinery loans.)
It is not unusual to find when these factors are all put together that the
cost of setting up new premises are double and more of the
net amount received. While the cost might be reduced by buying
used equipment most such items are not available on the market.
It is true with most equipment that when you want it you cannot
find it for sale, and when you want to sell it there are no
customers. That is why machinery and equipment are deemed
specialty items.
But aside from availability, the losses in plant production
that come from even one faulty used machine make most buyers
leery of buying anything but new. Such losses often exceed
the supposed savings effected. The machine that is working
fine in one plant may be different after is has been disassembled
for moving and reassembled again in a new location. Even with
his own equipment this is a problem, but someone else's unknown
equipment, for most, is just not worth the risk even considering
a lesser initial cost.
Financing Problems
Assume that, despite this, a tenant decides to go ahead and
claim for all he has installed while setting up a totally
new plant. Now he has the problem of financing, Most businessmen
do not have the cash resources to pay for a new plant. Mostly,
their assets are tied up in the condemned premises between
capital equipment, stock and goods in production. They cannot
receive their award until their case is disposed of and the
time lag often is tow or more years. Banks will not lend on
the security of a potential award. Financing the machinery
being bought by equipment loans only pays for a portion of
the cost and at very high interest rates in comparison to
what they are getting. Business which travels this route can
choke and die on the carrying costs of these loans and their
lack of cash availability.
Assume further that a tenant still stubbornly insists upon
this course of action. Now he has the worry of machinery deliveries.
Most condemning authorities want site occupants out in fairly
short order. Certainly, a condemnee cannot be assured of any
certain, much less lengthy, tenure of the condemned premises.
If new equipment is to be purchased it rarely is in stock,
and must be manufactured to order. Delivery times are lengthy
and uncertain. There is always the risk that a tenant will
be forced out of the site before the delivery of ordered equipment
which will cause the shut down of the entire plant. The losses
which result may be enough to ruin the business.
These are truly formidable problems. When he weights them
against the fact that if he moves his equipment to a new location
he can be paid for his moving expenses and end up with no
one, or very few, of these losses there would appear to be
no contest as to what he should do. In New York City condemnation
proceedings, as well as in all federally subsidized proceedings,
actual removal costs are paid on a reimbursement basis up
to $100,000. In other jurisdictions, the amounts payable in
non federal subsidized proceedings differ. However, in order
to retain federal subsidies there must have been adopted by
July 1,1972, the provisions of Public Law 91-646, known as
"Uniform Relocation Assistance and Real Property Acquisition
Policies Act of 1970" in so far as federally subsidized
projects are concerned. This act provides, among other remedies,
for the payment of the total reasonable relocation costs without
any dollar limit. The State Commission on Eminent Domain in
its 1970 report has recommended the adoption in its entirety
the provisions of this act applicable to all condemnees in
this state, whether or not federally subsidized.
But unfortunately for most condemnees the choice is not as
simple as stated thus far and they become hung on the horns
of a dilemma as to what to do. There is another side to this
coin.
Variety of Problems
Weighed against the above is a variety of problems. The moving
of a business and setting it up in a new location, then getting
the reassembled machinery to work properly and in synchronization
with the entire plant so as to get production going very often
involves a substantial period of time. During that time there
is little if any production. Not only does overhead continue
but so must salary of personnel. The owner's time is fully
taken up with the move and start up. He has no time for getting
business or handling customers.
Meanwhile, for practical purposes, the plant is out of business.
Orders are not being taken or filled and customers are being
lost. If it is a competitive business-- and very few aren't--
there will be because of the shutdown only the most loyal
customers left to resume business with, and they may be a
fraction of those the business had before the move. Most customers
will give their business elsewhere if you cease to service
their accounts and you cannot service it if you are out of
production. When he is finally in production he will be like
a new business, just starting out with few, if any, customers.
Of course, any profits that could have been made have been
lost and the owners can be thankful if he hasn't lost his
business as well. He may lose money by building a new plant
but at least he has his business intact. He may save money
by moving his equipment but he ends up with no business.
He has still other worries. Machinery and equipment, properly
serviced, repaired, renewed and taken care of will continue
to work in a plant for an indefinite period of time. Most
new models of machines put out do not change from the basic
design concepts of older machinery, thus older plants continue
to operate as well as newer ones and are competitive with
them.
But move those machines, especially if they have been operating
for some time, they just do not operate right again. It may
be many months of trial and error until they do. Some machinery
which has been in operation for some time, particular when
it has been exposed to water, steam and/or hear just will
not survive being disassembled, moved and reassembled no matter
how easy it may appear. Moreover, you just cannot be sure
what will happen once you start. Does he take the risk of
moving and committing himself to a position based upon this
and then find that the machine is no good to him. What happens
to his business if he first has to order new machinery then
and it is not available for many months. If essential to his
operation the results may be drastic. In the meanwhile he
has waived the claim for its value in condemnation proceeding
by having moved it. (Great A. & P Tea Co. V. State of
N.Y., 22 N.Y. 2d 75,1968 ).
Choices Must Be Faced
These are not easy choices under the best of circumstances.
But come condemnation they must be faced, answers found and
usually under pressure with little time to find solutions.
And they must be solved with the risk from a wrong choice
being as drastic as the death of the business.
The decision in Rose v. State (24 NY 2d 87, 1969) and City
of Buffalo v. J. W. Clement Co. (28 N.Y. 2d 258,1971) although
based upon facts in a different setting partially addressed
themselves to the problem. Both of these cases were, in those
aspects dealing with trade fixture, claims for damage to fixtures
which had never been condemned. Rose v. State, supra, dealt
with consequential damages to fixtures on property which had
not been taken and as to which title had never passed to the
condemnor. Some were removed to the new plant. Many were sold,
City of Buffalo v. J. W. Clement Co., supra, dealt with fixtures
which had been moved from the premises under duress prior
to a vesting of title and again as to which title never passed
to the condemnor.
In both cases the court in attempting to do substantial justice
recognized that fixtures could be removable and still be fixtures
and applied a rule of damage applicable to when they were
removed "or capable of being removed," on broadly
equitable grounds, limiting damages in such a case to either
moving expenses or the difference between in place value and
salvage value whichever was less. The court refused to apply
the doctrine set forth in Great A & P Tea Co. V. State
of N.Y. (Supra), which significantly, it did not overrule,
that removal by a claimant of fixtures constitutes a waiver
of the claim. Instead it set forth a procedure by which fixtures
could be removed and the rule not apply. While there is dicta
in both cases which might seem to apply such a principle broadly,
it remains to be seen how it will be applied to particular
facts when the question is directly in issue as to fixtures
as to which title has vested in the condemning authority.
In any event a footnote in Rose v. State, at page 976 of
298 N.Y.S. 2d to the statement "the Stattte is not required
to place a claiment in better position than he was before
the taking by helping him to finance a new facility"
gives clear recognition that such a rule would not apply in
any event where business necessity dictated that the machinery
not be moved.
"Even if fixtures could be removed the proper measure
of damages cannot always be made with reference to moving
expenses. If the claimant establishes that business necessity
required it to construct an entirely new facility while operating
the old facility in order to maintain business contacts or
satisfy contractual obligation, then the cost of moving the
old fixtures should not be used. Also in those instances where
the fixtures though moveable would not be appropriate in the
new physical surroundings or their original motif would not
complement the decorative scheme of the new facility because
dated, moving expenses would not be the proper measure of
damages."
Business Necessity
To us, at least, who have dealt with many fixture owners
who have faced the dilemma posed by condemnation, the fact
that an owner, despite the obvious and substantial out of
pocket loss facing him from such a course of action and still
chooses not to move his machinery, leads to the presumption
that business necessity dictated such a move. (And in many
instances condemnation proceedings pose such problems of starting
again from scratch that many concerns go out of business rather
than face it.) Particularly so in those jurisdictions where
he could be paid his full moving expenses, which he apparently
now can be paid in any event as a matter of common law (Rose
v. State, supra).
And where, under such circumstances, fixtures which have
been condemned are not moved we assume that Rose v. State,
has not changed the basic law of valuation of non-removable
(whether for business considerations or otherwise) fixtures.
Such a rule is fair to the condemnee and to the condemnor.
The condemnor cannot be hurt when the condemnee is paid fixtures
condemned do have a salvage value, it is there for the condemnor
to sell and realize as its property.
It takes the guesswork out of determining on a trial,which
might take place before a condemnee moves, what that salvage
value might be which so often depends on whether there is
any buyer at all available at that particular point in time
for the items involved. Whatever the amount the condemnor
is free to receive it. Where as in Rose v. State and City
of Buffalo v J.W. Clement Co. Title to the fixtures never
passed to the condemning authority so that they could not
sell and realize salvage value then fairness in that particular
fact situation dictated a mitigation of damages by sale for
salvage value by the condemnee if the fixtures were not being
moved to a new plant.
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