What constitutes a fixture as opposed to a trade-fixture in commercial real estate leases has befuddled attorneys and judges for as long as… well, for a very long time. One of the problems that can arise when a landlord or a tenant guesses wrong, is that they may be liable for conversion of property. For example, if a tenant believes that certain tenant improvements are trade-fixtures (typically the property of the tenant) and removes the property at the end of the lease, if the property is a fixture owned by the landlord, the tenant may be liable for conversion of the landlord’s property. The converse is also true; a landlord who wrongly asserts ownership of the tenant’s property can also be liable for conversion. And, in many states, damages for conversion of property can be steep. In Michigan, under certain circumstances actual damages may be tripled and reasonable attorney’s fees recovered. That can make items of relatively little value become very costly.
I’ve seen this in my own practice on several occasions, and I’m aware of at least three other Michigan cases where conversion of landlord or tenant property had dramatic consequences. Most recently, in Cassidy Rae Studio, LLC v Michael Bocks,[i] the trial court agreed with the tenant that a large cabinet and countertop with a sink used for mixing hair color was a trade-fixture that belonged to the tenant. The tenant sued when the landlord claimed ownership of the cabinet to a third-party interested in purchasing the tenant’s assets, including the cabinet that the tenant had removed from the leased premises. In part, because of the landlord’s assertion of ownership, the trial court found that the landlord had converted the tenant’s property and assessed the landlord treble damages and attorney’s fees. The landlord appealed the trial court’s ruling and won on appeal. The court of appeals found that it was the tenant, and not the landlord, that had converted the property, subjecting the tenant to the possibility of treble damages and attorney’s fees. A stunning conversion! How could a trade-fixture be converted to a fixture (no more puns, I promise)?
In the Cassidy Rae Studio case, the determination that the cabinet was a fixture and not a trade-fixture turned not on the nature of the item itself, and not on whether the item was “affixed” to the real estate (both fixtures and trade-fixtures may be, to some degree, attached), but on the language of the lease. The critical determination was whether the applicable terms of the lease were ambiguous, or unambiguous. The trial court found ambiguities allowing the tenant to introduce evidence that it paid for the item through increased rent. The court of appeals found no such ambiguities, enforcing the plain language of the lease which stated that the item would be installed at landlord’s sole expense, and that at the end of the lease, all improvements (except trade-fixtures) would become the property of landlord. So what was initially ruled to be a trade-fixture, allowing conversion damages for the tenant, was deemed a fixture, allowing conversion damages for the landlord.
Preventative medicine dictates that the parties carefully express in the lease their intent with regard to ownership of improvements to the premises. But, whether you are a landlord or a tenant, if you find yourself in this predicament it will be important to consult with your real estate attorney before taking any action with regard to asserting ownership of fixtures or trade fixtures under your commercial lease.
[i] Michigan Court of Appeals Case No. 345984, December 26, 2019, (Unpublished – lacking precedential value).