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The Law of Trade Fixtures
By Michael Rikon
The law of trade fixtures, as applied to condemnation
proceedings, has evolved to the point that everything installed
by a claimant or used on the premises which will lose substantial
value upan removal is compensable as a trade fixture.
Introduction
Generally, when land is taken by the exercise of the power
of eminent domain, all that is annexed to the land is appropriated,
whether classified as buildings or as fixtures, and the value
of the fixtures must be included in determining the total
value of the property so appropriated.
In New York, trade fixtures are a distinct property interest
in eminent domain proceedings, having their own rules of law
and valuation. The law of trade fixtures has evolved over
the years as a means to compensate a condemnee who had an
interest in the land acquired, which was less than a fee interest.
A claimant who was a tenant, or who otherwise was legally
in possession, would not ordinarily receive any compensation
in a condemnation proceeding. Under most written leases, the
law would not allow a tenant to obtain compensation for the
tenant's leasehold interest, nor could the tenant recover
for the loss of its goodwill.
Thus, in order to compensate a tenant, as must be done under
the Constitution, the oveniding rule of condemnation was established
that "each owner, landlord or tenant, is entitled to the value
of what the Government took from him."
Although most cases involving trade fixtures involve claims
by tenants, it is clear that fee owners are also entitled
to recover for the trade fixtures that they have installed,
in addition to the value of their real property.
New York State's highest court, the Court of Appeals, has
observed:
"New York takes a broad view in evaluating what improvements
are to be regarded as [trade] fixtures. Not only is machinery
deemed a fixture where it is installed in such manner that
its removal will result in material injury to it or the realty,
or where the building in which it is placed was specially
designed to house it, or where there is other evidence that
its installation was of a permanent nature, but also those
improvements which are used for business purposes and which
would lose substantial value if removed...This formulation
of the rules permits equitable treatment of the owner of fixtures
[and] signifies a recognition of the obvious realities confronting
the business community."
Classic Definition of a Fixture
A fixture is "a thing of an accessory character annexed to
houses or lands which become, immediately on annexation, part
of the realty itself." A fixture is a chattel attached to
the realty; a chattel is an article of personal property,
which is any species of property not amounting to a freehold
or fee in land. The term "trade fixtures" means many things
to lawyers in different contexts. In the Law of Eminent Domain,
it denotes a claim for compensation for the taking of fixtures,
equipment, and improvements made to a property. The claim
may be brought by a tenant or an owner of the property. The
compensability of trade fixtures in a condemnation case differ
vastly from state to state.
Many states use the definition derived from Teaff v. Hewitt.
Teaff defined fixtures as items that are annexed to
the realty, are adapted or applied to the use or purpose of
that part of the realty to which they are connected and are
intended to be permanent. The state of California calls trade
fixtures "improvements." The California statute defines improvements
as "any machinery or equipment installed on the property."
If the item cannot be removed with out substantial damage
or loss to either items or property, it is an improvement.
The term "fixtures" in New York has been loosely applied
to articles which are annexed to the realty."
When land is taken under the power of eminent domain, the
condemnor takes title to everything annexed to the land, whether
classified as building or as fixtures. The common-law rule
that evervthing attached to the freehold is considered part
of the real estate was changed early in New York law to protect
the interests of the one who installed the improvement.
The law of landlord and tenant recognized the hardships in
not allowing the tenant to remove his fixtures, but the law
of eminent domain went further. In In re City of New York
(North River Water Front) the court stated:
As between landlord and tenant the tenant is allowed to remove
fixtures annexed to the freehold, but it is only as between
landlord and tenant that the rule of the common law, that
anything that was annexed to the freehold by a substantial
connection becomes a part of the realty, has been relaxed.
The city is not the landlord, and as against the tenant has
not acquired the landlord's rights, but is taking this property
against the wish of both the landlord and the tenant for its
own purposes. The rule that exists as between landlord and
tenant, which has been evolved by the courts to prevent injustice
to the tenant, should not be applied so that a beneficial
use of the property is taken from the tenant without making
him a fair compensation for the property as a whole.
It should be obvious that all items found on the premises
of a parcel condemned for public purposes, outside of the
raw land itself, were once personal property, Even the building
which has now be come part of the realty was a mass of personal
property items. The bricks, lumber, glass, concrete, pipes,
wiring, etc. have now become integral parts of the real estate.
While these items remain movable and retain their own character,
there is no difficulty in comprehending their separate identity.
It is only when they become annexed and still viable that
they are mixed property or fixtures.
The same applies to items which never have been annexed to
the freehold and which still retain their separate identity
even though they are used in conjunction with the real property,
or used in con junction with occupant's trade. Even items
which ordinarily would lose their identity and become part
of the realty are compensable trade fixtures in a condemnation
if they were added for the occupant's business purpose. Common
examples of this would be tiles added to floors or dropped
ceiling tiles or special doors or coatings added to meet code
requirements, etc.
Again, New York takes a broad view in evaluating what improve
ments are to be regarded as fixtures. These are items sufficiently
annexed to the freehold to become assimilated as part of real
estate, yet still retain an individual identity.
Real estate is distinguished from personal property by its
fixed, permanent, and immovable character. A fixture, therefore,
will be considered as real estate and eligible for compensation
in a condem nation proceeding if it was added to the premises
with the intention that it become a permanent accession to
the freehold. The existence of this intention is determined
from the circumstances of each case.
But, annexation is not itself necessary to render an article
a fixture. The nature of the item or the use to which it is
put in the condemnee's business may require fastening by bolts,
screws, or other devices of affixation that will secure the
item without preventing it from being readily removed and
used elsewhere, with like utility and without injury to the
item itself or the freehold. It is the intention of the annexor
into which the courts inquire and not the manner of fixation,
if any. An item may be completely freestanding and be a compensable
trade fixture.
In eminent domain cases, the courts have found the intention
when they are faced with articles which would have little
value when re moved or when the removal will result in material
damage to the realty or to the item.
Removability is Not a Test of a Trade
Fixture
Older cases involving trade fixture claims focused on the
need of the claimant to establish the intention to make the
item a permanent installation. Presumably, this was established
by actual annexation. If an item, say a machine, was removable,
it was said to be noncompensable.
Removability, however, has long ceased to be a consideration
of compensability of a trade fixture. In In re City of New
York (Ruppert Brewery), Justice Sidney A. Fine, sitting in
the condemnation part of the New York Supreme Court for the
County of New York, wrote:
Thus it appears that the law, as long established, has clearly
negated removability as the test of a fixture. Nevertheless,
in this case and in every case involving fixtures tried in
this jurisdiction in recent times, the City has relied on
physical removability as the principal criterion of compensability.
In this case as in most other cases, it has done so in misapplied
reliance on the Whitlock Avenue case (278 N.Y. 276)
in which the Court of Appeals, after finding a failure of
proof with respect to adaptability and intention of permanence,
held that the readily removable looms claimed by the tenants
in that proceeding were not compensable as fixtures. Despite
the total rejection of its theory in case after case, the
Corporation Counsel persists in the futile repetition of the
argument that all removable fixtures are per se personal property.
In face of the recent decisions in Rose v. State, supra;
Cooney Bros, Inc. v. State, 24 NY2d 387; and Marraro
v. State, 12 N. Y. 2d 285, the time has surely come for
the City to lay this ancient ghost to rest and in the future
to adapt its legal posture to conform to its responsibiiities
to all parties including the Court.
Justice Fine's outstanding language became the foundation
for all future jurists writing in this area. Thus the Ruppert
Brewery decision was quoted verbatim by Justice Brown in In
re City of New York (Atlantic Terminal), and by Justice
Shapiro, sitting in the Appellate Division, Second Department,
in City of New York (Bedford Stuyvesant-Merrimaker Corporation).
Perhaps the best example of the nonrelevance of removability
is Matter of City of New York-Fulton Park (Kerievsky).
In Kerievsky, three partners operated a cabinet shop which
had small common woodworking machines. One of the three principals
of condemnee chose to establish a similar but smaller business
operation and re moved some of the machinery. The condemnor
argued that this fact clearly indicated that none of the machines
were trade fixtures. The appellate court disa,oreed and held
that since the nonremoved ma chinery, qua fixtures, was part
of the premises to which the City took title on the vesting,
there should be no deduction from the sound value of same.
Fixture Test
It is clearly the law in New York that an item will be considered
a trade fixture if it meets two tests: (1) the item was installed
in fur therance of the claimant's business (whether used or
not) and (2) the fixture would lose substantial value if removed.
Thus, in an appropriate case, items which normally might be
considered personalty such as tables and chairs in a nightclub
become compensable trade fixtures when it is demonstrated
that they were specially designed for the premises and would
lose substantial value if removed.
The Sum of the Parts Exceed the Whole
In condemnation, the total trade fixture installations can
exceed the value of the building where they are located. Condemnors
often argue that they should only be required to pay just
compensation once and that by paying for trade fixtures and
the fee, there is a duplication of an award. However, this
argument ignores the constitutional obligation to pay each
owner the value of what the Government took.
Both the New York State and Federal Constitutions mandate
the payment of just compensation. The constitutional requirement
of just compensation mandates that the property owner be indemnified
so that he may be put in the same relative position, insofar
as this is possible, as if the taking had not occurred.
Just compensation is properly measured by determining what
the owner has lost.
It is axiomatic that the measure of compensation for property
taken is the owner's loss and not the taker's gain.
There are also different measurements of compensation for
each claimant. A trade fixture is valued at its reproduction
value less de preciation, or sound value.
A fee interest will normally be valued by the capitalization
of income approach or by the comparable sales approach. No
condemnor will be able to demonstrate the effect that any
tenant's trade fixtures had on the value of the fee. Indeed,
most real estate appraisers will normally disclaim any consideration
of trade fixtures in their real estate appraisals. Most premises
are demised without fixtures or require exten sive renovation
to remove the fixtures of the former tenant.
The Unit Rule Has No Application
To Fixture Claims
The unit rule provides that one award is to be made for
a parcel, notwithstanding that there are separate interests
in the parcel. The rule has many applications including instances
where there is a leasehold interest. Where fixture interests
are concerned, whether claimed by owner or tenant the courts
have specifically disavowed any attempt to reduce the fee
award by the amounts awarded for trade fixtures.
The unit rule would carve out of the fee award the amount
awarded for the fixtures if the fixture claimant was a tenant
or make no award at all.
The unit rule has been criticized and said to be in "the
shadowland between substance and procedure."
Recent appellate cases have put this attempt to limit just
compen sation finally at rest. In Whitehall Corners, Inc.
v. State of New York, the condemnor, State of New York,
in an appropriation, attempted to reduce the award to the
owner of a property by the amounts awarded for floor tiles,
paneling, ventilation and air conditioning equipment, storage
units, various bathroom fixtures such as sinks, urinals, and
toilets, and a 200-amp circuit breaker panel to a trade fixture
tenant who operated a restaurant, arguing that these items
"were necessar ily included in the fee award." The Court would
not disturb the sepa rate awards made to the fee and fixture
claimants.
There have been other unsuccessful attempts to "carve out"
fix ture awards from fee awards. Clearly, this theory has
no basis in law or appraisal practice.
Lease Language Will Not Change the
Compensability of Trade Fixtures
Condemnors often recite lease terms as evidence that a trade
fix ture claimant may not receive compensation for the fixtures
the ten ant installed. The argument usualiy is that the tenant
agreed in the contract with the landlord that the fixture
became the landlord's prop erty upon annexation. Another argument
frequently advanced is that the lease did not allow a tenant
to remove a fixture upon expiration of the lease term.
It is not a situation of deciding whom to pay for it. It
is obvious that in these situations, the landlord will not
recover for fixtures in stalled by its tenant. Nor, can it
be demonstrated that the fixtures added to the rental value.
Rather, it is an attempt to deprive the trade fixture tenant
of compensation. The argument, however, has no basis in law
uniess the lease is with the condemnor. This is because the
law is well established that what is considered a fixture
between vendor and vendee is what the condemnor takes in a
condemnation proceed ing, whether the claimant be the fee
owner or the tenant. Generally, 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.
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 mort gagor and mortgagee, or conditional
vendor and vendee, but is gov erned by the rule applicable
between grantor and grantee. That which passes to a vendee
on the sale of the land, the condemnor takes in a condemnation
proceeding. The condemnor does not secede to the rights of
the landlord in his relationship to the tenant.
The Court of Appeals of New York State put the lease language
argument to bed long ago in Marraro v. State of New York.
The Language of a Chattel Mortgage
or U.C.C. Security Agreement Has Nothing to do With the Compensability
of a Trade Fixture
Language in chattel mortgage agreements or security agreements
have no relevancy at all to a condemnation proceeding.
As was stated by Judge Jasen in In re City of New York
(College Point -- G. & C. Amusements): "The Court, in
determining the appro priate compensation for the taking,
looks only to the status of the property when it is taken
by the sovereign."
The secured creditors of the machinery are no longer secured
by the fixture itself. Upon the vesting of title, the condemnor
took title in fee simple absolute. The former perfected liens,
if any, transfer by operation of the law and become an equitable
lien on the proceeds of the award.
A valid chattel mortgage on fixtures becomes a lien upon
an award in condemnation for any property it covered. In
re City of New York (Site for Courthouse and Jail), but
a lien perfected under Article 9 of the Uniform Commercial
Code does not make a trade fixture an item of personalty.
A Trade Fixture Claimant Is Entitled
to Compensation for A11 Trade Fixtures Available for Use in
the Premises
Condemnors often contend that a trade fixture claimant is
not en titled to compensation for any item of machinery not
being used in its business. "Unused or excess capacity machines"
are not compensable, one is often advised. Sometimes, the
argument is made that the claimant was not in business at
title vesting.
Fortunately, both the New York State and Federal Constitutions
mandate the payment of just compensation. The constitutional
re quirement ofjust compensation mandates that the property
owner be indemnified so that he may be put in the same relative
position, inso far as this is possible, as if the taking had
not occurred.
Just compensation is properly measured by determining what
the owner has lost.
It is axiomafic that the measure of compensation for property
taken is the owner's loss, and not the taker's gain.
If all of the fixtures claimed were installed, owned, valuable
and available for use by the claimant, they are compensable.
The con demnor must pay "just compensation" for taking them.47
It is often important to note that if a condemnor chooses
to argue that unused or excess capacity machines are not compensable,
it wiil be required to answer any trade fixture claim with
an aff~rmative defense. A claim ant should then move for an
immediate hearing prior to any demoli tion of the premises.
Increments Are Mandated in the Valuation
of an Integrated Plant
The law of the State of New York is that the trade fixtures
in an integrated plant have an enhanced value. The Court must
value the claim on the basis of a "turnkey" installation.
In Jackson, the con demnor did not condemn an idle
piece of machinery crated and lo cated on a loading dock.
It condemned an integrated facility which was designed, engineered,
and constructed over years.
Each fixture was integrally related to the others. All elements
were designed to complement each other. The facility was an
integrated "system" installation which required a great expense
not only of money, but of time, so that all fixtures were
interrelated.
The condemnor must compensate for the expense incurred in
putting the system together.
A Fixture Claimant Is Entitled to
Interest to the Date of Payment
A claimant is entitied to interest on its award from the
date of acquisition until the date of payment.
New York State's Court of Appeals has directiy decided the
issue in In re City of New York (Salvation Army). Judge
Fuchsberg held in Salvation Army that interest for the period
of delay is for the condemnor's withholding of the condemnee's
award, which belonged to it beneficially from the very first
time of the taking.
The Constitution requires that a property owner receive
just com pensation for the taking of its property. Unless
payment is made si multaneously with the transfer of title,
just compensation must include an additional sum as compensation
for the delay in payment.
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