LAW ON FIXTURES AND CHATTELS

The law governing the distinction between fixtures and chattels is complex and has undergone numerous refinements over the years. The importance of the distinction, in practical terms, is that if an object is a fixture, it is treated as forming part of the land, (and will pass with the land) whereas if it is a chattel, it remains independent from the land. Fixtures are chattels that become part of the land as a result of annexation to it, and annexation is a question of fact depending upon the:

  • degree of annexation and
  • purpose of the annexation

In considering the degree of annexation, the relevant tests are: how firmly is the object fastened or affixed to the land, and can it easily be removed without injury to itself or to the fabric of the building?

In considering the purpose of the annexation, the question is whether the article was affixed:

  • for the permanent and substantial improvement of the building, in which case it is likely to be a fixture, or
  • for a temporary purpose, and/or for the better enjoyment and use of it as a chattel?

Landlord’s or tenant’s fixtures?

In a landlord and tenant context, fixtures are sub-divided into landlord’s fixtures and tenant’s fixtures. Although fixtures generally become part of the land during the lease term, tenant’s fixtures enjoy special treatment and tenants are entitled at common law to remove them, unless prevented from doing so by the lease. The Court of Appeal decision in Peel Land and Property (Ports No.3) Limited v TS Sheerness Limited (2014) EWCA Civ 100 provides a worrying example of how this can happen, even in the absence of an express provision.

WHAT LED TO THE DISPUTE?

The dispute arose between TS Sheerness Limited (“TSS”), the current tenant of a steel factory in Kent, and its landlord, Peel Land and Property (Ports No.3) Limited (“Peel”) about the removal of plant from the factory during the lease term.

A former tenant at the property, Thamesteel Limited, went into administration in January 2012. Peel brought proceedings against Thamesteel for a declaration that it, the landlord, was the legal owner of all the plant and sought an injunction restraining removal of any of it by TSS, a special purpose vehicle established to acquire Thamesteel's business and assets. TSS took an assignment of the lease in June 2012, and was substituted as the defendant.

Ownership of the plant was not obvious from the lease, a 125 building lease granted in 1971. The lease defined the demised property by reference to the “Site” together with the “Buildings” erected on it but despite the capital B, “Buildings” was not defined, leaving it unclear whether the demised property included tenant’s fixtures installed within the Buildings.

HIGH COURT

In the High Court, Peel argued that TSS had no right to remove the plant during the term, firstly, because the tenant had covenanted to erect a building and equip it as a steel mill, and secondly, because it was prohibited from doing so by the alterations covenant. This prevented the tenant from altering the property other than in connection with use of the property for the purposes of steel making and ancillary operations, which did not include removing the plant in order to sell it.

The alterations clause made no reference to tenant’s fixtures, unlike the yielding up clause where the tenant had expressly covenanted to yield up the property “with all fixtures except tenant’s or trade fixtures”. So there was no doubt as to whom the plant belonged at the end of the term, only during it, but that was the issue at stake. The factory was no longer in use, but the scrap metal value of the plant would be considerable, and no doubt a large part of the reason why TSS bought the business.

The trial judge rejected Peel’s first argument outright. A term requiring a tenant to install fixtures did not, by itself, prevent it from removing any that it was entitled to remove.

On an item-by-item basis, the judge ruled that most of the items of plant were either not annexed to the land (and so remained tenant’s chattels) or were tenant’s trade fixtures. TSS relied on Woodfall: Landlord and Tenant which says that, if a landlord wants to restrict a tenant's ordinary common law right to remove its trade fixtures, it must say so in plain language, and the judge agreed. Very clear wording was required to oust a tenant's common law right to remove its trade fixtures and the alterations covenant did not satisfy that test. TSS was entitled to remove all but one of the disputed items during the term.

In categorising each item, the judge ruled that it was irrelevant that its removal would be complex, costly and time-consuming and also said that the value of an item was not a factor for consideration.

COURT OF APPEAL

By this stage, there was no longer any dispute about the nature of the plant so the only question for the Court of Appeal was whether the lease allowed the tenant to remove its fixtures during the term, in order to sell them.

Peel argued that the alterations covenant was clear enough to override the common law: the covenant applied to the demised property (which, although ill-defined, meant the property as it was from time to time, and not as demised on day 1 of the lease), and ‘alterations’ included removing fixtures other than for the purpose of replacing or updating them, so TSS would be in breach of covenant if it did so. Even if the covenant was not crystal clear, Peel continued, there was no general rule that especially clear words are required to override a tenant's common law right to remove its fixtures.

The court examined the statement in Woodfall, relied on by TSS and the trial judge, which originated in Lambourn v McLellan [1903] 2 Ch. 268. Observing that the comment had only been articulated by one of the appeal judges, the Court of Appeal in Peel pronounced it obiter and ruled that it was not capable of being elevated to a general principle of law. The lease must be clear, but not especially so. TSS argued that the lease was not clear, since the alterations covenant did not mention fixtures at all, in contrast to other lease covenants, for instance, yielding up and repair.

DECISION

The court acknowledged the inconsistency between the various covenants but ruled nonetheless that TSS was not allowed to alter the demised property by removing plant for the purpose of selling it. Furthermore, an interpretation of the lease that allowed the tenant to do so would conflict with the central commercial obligation under the lease requiring the tenant to erect and equip a steel-making factory. Removing the fixtures with the intention of selling them, as opposed, for example, replacing them, was not a permitted alteration within the meaning of the covenant.

COMMENT

The Court of Appeal has previously ruled on this issue, in Lambourn, in favour of the tenant, and in In re British Red Ash Collieries Limited [1920] 1 Ch. 326, in favour of the landlord. In both cases, the court reached its decision on the wording in the leases. In Peel, the semantic arguments could have gone either way, which is perhaps why the Court of Appeal resorted to the commercial purpose test. There was scope for further argument about what the original parties to the lease might have intended back in 1971 (although it is equally possible that they had given the matter no consideration at all) and for this reason, the case may go the Supreme Court.

AVOIDING DISPUTES ON REMOVAL OF TENANT'S FIXTURES

Landlords

  • Does the landlord want to restrict the tenant from altering or removing the tenant’s fixtures during the term, either absolutely, or with the landlord’s consent?
  • Is the landlord making a contribution to the tenant’s fixtures and if so, for what purpose? In some cases, it may be appropriate for the landlord to retain ownership during the term and on expiry.
  • If so, very clear wording should be used, to oust the common law presumption that the tenant retains ownership of its trade fixtures and avoid disputes on the scale seen in Peel.

Tenants

Where a tenant is installing valuable trade fixtures, it will want the lease to be very clear that it is retaining ownership of those fixtures, throughout the lease term as well as on expiry, and all the more so in the case of a long lease. Suggestions for clarity include:

  • inserting an express recital to this effect. This will provide a useful record of the parties’ intentions, should these need to be ascertained at a later date.
  • clearly defining “the Demised Property”. If defined to include “all additions, alterations and improvements from time to time, except for tenant’s and trade fixtures”, a covenant against altering the property will not, on its own, prevent the tenant from removing its fixtures during the term since they will not form part of the demise. Without that exclusion, or similar contrary provision in the lease, tenant’s fixtures will become part of the demised property for the duration of the term, even if the tenant is permitted to remove them on expiry.
  • when drafting other lease covenants, ensure consistency between all relevant provisions – definition of the demised property and any buildings, repair, alterations, yielding up, user, rent review, insurance and reinstatement – so as to leave no room for argument. If the question of ownership of tenant’s fixtures is unclear, and the issue ends up in court, principles of contract interpretation will bring every part of the lease under scrutiny. Tenants should be able to remove their fixtures during the lease and on expiry.

This article was published in New Law Journal in July 2014.