Specifying Items as "Nontrade Fixtures" to Prevent Their Removal

Q My tenant operates a restaurant in the space I rent to it. The lease for the space is nearing its end, and the tenant plans to move out instead of renewing the lease. The tenant is claiming that lighting fixtures and a liquor bar that are built into the space are trade fixtures and that it should be allowed to remove the items at the lease's end.

But I think that these are nontrade fixtures that should stay in the space. I'm afraid that the tenant might take matters into its own hands and remove the items that I consider to be nontrade fixtures. These items enhance the space and allow me to easily rent it to other restaurant tenants. What provisions can I include in future leases to prevent tenants from removing valuable items from the space when they move out?

A Many commercial leases require a tenant to remove its “trade fixtures” from the space when the lease ends, but leave behind any “fixtures,” also known as “nontrade fixtures.” A trade fixture is the tenant's personal property that it installs in its space to conduct its trade or business but intends to take away at the end of the lease, says Milwaukee attorney Nathaniel A. Hoffman. Also, the tenant should be able to remove the trade fixture without causing great damage to the space or to the item itself.

However, a nontrade fixture is typically a permanent improvement that is uniquely adapted and attached to the space, and can't be removed without causing great damage to the space or the item. Nontrade fixtures are considered commercial real estate owners' property, says Hoffman.

If you had specified in the lease with your current tenant which furnishings, machines, pieces of equipment, additions, or other items of personal property in the space are nontrade fixtures that the tenant must leave at the end of its lease, you could have avoided this dispute. But you can negotiate future leases so that it's clear what a nontrade fixture is when the time comes for the tenant to return its space to you.

Case in Point

A dispute over who owned certain fixtures burned a Massachusetts owner whose lease said that its tenant had to get the owner's consent if it or its subtenant wanted to install a “structure—a nontrade fixture—in its space. The tenant sublet to a bank, which, without the owner's consent, installed an automatic teller machine (ATM) kiosk in the space's parking lot. The owner claimed that the tenant violated its lease by letting the subtenant install a structure—that is, the ATM kiosk—without the owner's consent. The tenant argued that the ATM kiosk was a “trade fixture,” which didn't require the owner's consent.

A Massachusetts appeals court ruled that the ATM kiosk was a trade fixture. The term “trade fixture” was not defined in the lease. The court, therefore, created a definition of a trade fixture and then reasoned that the ATM kiosk met that definition [Chapman v. Katz].

Avoid Fixture Disputes

To avoid trade fixture/nontrade fixture disputes over items in the tenant's space, specify in the lease which items are nontrade fixtures, says Hoffman.

For example, if you consider an ATM, supplemental HVAC system, and lighting fixtures to be nontrade fixtures, list those as examples of “nontrade fixtures” in your lease's surrender clause, he advises. That will prevent the tenant from arguing that those items are trade fixtures and trying to remove them when the lease ends. To do this, make sure your lease's surrender clause includes language like this:

Model Lease Language

All installations, additions, decorations, hardware, nontrade fixtures (including, but not limited to, [insert items, e.g., ATM, supplemental HVAC system, and lighting fixtures]), and improvements, except movable furniture and equipment belonging to Tenant, in or upon the Premises, whether placed there by Tenant or Landlord, shall be Landlord's property and shall remain upon the Premises, all without compensation, allowance, or credit to Tenant.

And consider listing in the surrender clause those controversial items that you consider to be trade fixtures, so that the tenant won't argue that they are nontrade fixtures and try to leave them behind in its space when the lease ends, adds Hoffman.

Insider Source

Nathaniel A. Hoffman, Esq.: Whyte Hirschboeck Dudek S.C., 555 E. Wells St., Ste. 1900, Milwaukee, WI 53202; www.whdlaw.com.

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