Lease Assignee Doesn't Own Former Tenant's Structure

Facts: For over 30 years, an auto body business rented commercial property made up of several buildings. Ten years into the lease, the tenant built a small building on the property to use as a “paint room” where it could paint cars it had repaired. A few years later, it renewed the lease for a 20-year term, with an option to purchase the property. The tenant could exercise the option at any time during the lease if it gave 60-days' notice.

The lease provided that no major alterations, additions, or improvements to the property could be made by the tenant without consent, and that any such alterations, additions, or improvements and any fixtures installed as a part of those changes would become the owner's property when the tenant vacated the premises or when the lease expired—unless the tenant purchased the property. In that case, the value of the paint room would not be included in the price of the property because the tenant had installed and maintained the room at its own expense. A few years later, the tenant decided to construct another small building to use as a second paint room.

Shortly thereafter, the owner died, and his daughter inherited the property.

The tenant then sold its business and assigned the lease to the buyer, who continued to lease the property. When the lease expired, the new tenant informed the owner that the second paint room building belonged to it, and it offered to sell the building to the owner or to disassemble and take the building with it. The owner sued the tenant, arguing that the paint room building belonged to it.

Both the owner and tenant asked the trial court for a judgment in its favor without a trial. The trial court found that the paint room belonged to the owner. The tenant appealed.

Decision: A North Carolina appeals court upheld the ruling in favor of the owner.

Reasoning: The appeals court said that “as a general rule, whatever is attached to the land is understood to be a part of it.” However, leases also determine who owns structures built by tenants on land they lease, said the appeals court. The new tenant argued that the lease was ambiguous as to who owned building. The appeals court determined that the lease clearly stated that “any alteration, addition or improvement…shall at Lessor's option, become the property of the Lessor…upon expiration of this Lease—unless the tenant exercised his option to purchase.

The appeals court pointed out that when the original tenant hadn't exercised his option to purchase the property and instead had moved out and assigned the lease, the owner chose to keep the paint room building. Therefore, the paint room building already belonged to the owner when the new tenant moved in and was part of the entire property, which the new tenant wasn't entitled to any part of, either by law or under the lease.

• Johnson v. Lynch, II, and Jerry's Body Shop of Newport, Inc., November 2011

EDITOR'S NOTE: To make sure your tenants don't remove certain items from the property when they vacate the premises, see “Specifying Items as ‘Nontrade Fixtures’ to Prevent Their Removal,” in the October 2011 issue of the Insider, available on our Web site at www.commercialleaselawinsider.com.