It is not uncommon in a commercial lease situation to have to determine whether a tenant has the right and/or obligation to remove an item from the premises at the end of the term of the lease. The common law provides some rules that can be (and most often are) supplemented by lease terms. This issue was recently addressed by the Ontario Superior Court of Justice in Clemmer Steelcraft Technologies Inc. v. Bangor Metals Corp. et al. (“Clemmer Steelcraft”).
Chattels tend to be obvious and are not often a matter of dispute between the landlord and the tenant. On the other hand, fixtures can be an issue as the fixtures category itself has two components in the lease context. Fixtures may be either true fixtures (also known as leasehold improvements) or trade fixtures (also known as tenant fixtures).
True fixtures are items that have been fastened or annexed to the real property. The tenant has no common law right to remove true fixtures.
Trade fixtures are fixtures that, while affixed to the land, are particular to the tenant’s business or trade. While considered a fixture and, therefore, part of the land, as between the tenant and the landlord, the tenant has the right at common law to remove trade fixtures at the end of the term.
Most sophisticated commercial leases will supplement the common law rules. For example, a fixture (leasehold improvement) that is not a trade fixture would, in the absence of a specific lease term, remain on the premises after the lease ends. Many landlords try to reserve the right to require the tenant to remove its leasehold improvements, and this is commonly a negotiated point. Commercial leases also often obligate the tenant (as opposed to giving it the right) to remove its trade fixtures. In the Clemmer Steelcraft case, however, trade fixtures were dealt with in a different manner.
In this case, the tenant leased the premises for the purpose of designing, manufacturing and assembling large component pieces of heavy equipment. The tenant installed a large spray booth and racking for use in its business.
The spray booth was 20 feet wide, 45 feet long and 20 feet high. It was fastened to the floor, the roof and the structural steel, as well as being connected to the electrical system and natural gas supply line. Any dismantling of the spray booth would have been expensive and would have caused damage to the walls and facility floor. The cost of its removal along with the necessary remediation of the facility may have exceeded its value.
After reviewing the common law principles on distinguishing between chattels and fixtures, Justice Newbould concluded that the spray booth was a trade or tenant’s fixture that could be removed, but for the terms of the lease. And so, the language of the lease between the landlord and tenant governed the result in this case.
The lease provided at Section 21 that all “Leasehold Improvements and fixtures upon the Demised Premises and which in any manner are or shall be attached to the floors, walls, ceiling or roof of the Demised Premises shall, upon the Commencement Date, become the sole property of the Landlord….”
Section 21 was a standard form clause which originally contained an exception for trade or tenant’s fixtures that were to be listed in a schedule to the lease. That exception was struck out by the parties and the schedule was intentionally left blank.
Justice Newbould concluded that Section 21 in the lease made clear that fixtures attached to the premises, which included the spray booth and the racking, were the property of the landlord and could only be removed by the tenant with the landlord’s permission (which was refused in this case). This reversed the common law position. Accordingly, Clemmer’s motion was dismissed.
Although the Clemmer Steelcraft case has somewhat unique circumstances, it does serve to demonstrate that the terms of the lease will dictate whether a tenant is entitled to remove its trade fixtures. A tenant may incorrectly believe it can remove all items particular to its specific business. Landlords and tenants need to give careful consideration to tenant improvement, removal and restoration clauses at the drafting stage.