Electricity generation companies often take long term leases of land for electricity generation purposes. Power generation plant and equipment will be constructed and installed on the land. This plant and equipment is often referred to as ‘the kit’. This article considers the question: who owns the kit? The answer is relevant to a number of issues.
The general rule is that a party will continue as owner of property until that property is sold or transferred. However, this may not be the case if the property has become a ‘fixture’ at law.
A ‘fixture’ is an item of property which is fixed to land and becomes land, providing it satisfies the requirements for characterisation as a fixture at common law. Items of kit that are fixed to land, for example wind turbines, power generators, and transmission lines, could potentially all become fixtures.
Whether property has become a fixture turns on the intention with which it has been fixed to land (ie the ‘object of affixation’). If property has been fixed to land with the intention that it remain in situ permanently, and not merely temporarily, then usually it will be a ‘fixture’.
- Surrounding circumstances are relevant to assessing intention, including:
- the degree to which the property is fixed to the land, including the ease or difficulty of its removal;
- the level of damage that would result to the land by removal of the property;
- whether, upon its removal from the land, there is a re-sale market for the property;
- whether the property was fixed to the land for the better enjoyment of the land, or the better enjoyment of the property itself;
- the length of time for which the property is to remain fixed to the land; and
- the status of the person fixing the property to the land, e.g. tenant, mere licensee etc.
Other circumstances may be relevant.
Is the kit a ‘fixture’?
Each case will turn on its own facts. For example in the Uniqema case1 it was held that some items of a co-generation facility were not fixtures. The items were required to be removed by the tenant, and installed solely to produce electricity for the landlord (and not to benefit the land). By contrast, another case found that certain co-generation plant was a fixture.2
It is recommended that each item of kit be considered separately to determine if it is a fixture. Whether it is so is directly relevant to ownership.
Ownership of the kit
Generally, electricity companies will own the kit until they elect to dispose of it. However, if items of kit have become ‘fixtures’ then, subject to any statutory exceptions, ownership will pass to the owner of the land on which the kit is located.3
There may be specific statutory exceptions to this rule. In Victoria, a tenant retains ownership of fixtures it installs on rented premises subject to any agreement to the contrary.4 An electricity company entitled to rely on that legislation would retain ownership of kit it installs on leased premises in Victoria despite its characterisation as a fixture. However, this provision only deals with leasehold land. It does not address, for example, ownership of transmission lines located on easements.
State electricity industry legislation may also preserve ownership to electricity companies. For example, section 36A of South Australia’s Electricity Act 1996 has the effect that ‘electricity infrastructure’ installed on land remains owned by the relevant ‘electricity entity’. Examples of electricity infrastructure include electricity generating plant, power lines and metering equipment.
You might ask: why does ownership matter, so long as the tenant has a contractual right to remove the kit?
Ownership of the kit, and whether it is properly to be characterised as a fixture, will be relevant to a number of issues.
Specific issues may arise in the context of a restructure or sale of electricity company assets. In one case, duty was imposed by a state commissioner on the sale of power generation assets (ie kit) on the basis that they were fixtures and comprised an interest in ‘land’.5 Although the commissioner was ultimately unsuccessful, the case is a useful reminder that duty consequences can flow from the kit being characterised as a fixture.
Rates and taxes
Often, generation companies will assume responsibility for any rates, taxes or levies attributable to the kit.
Certain rates, taxes and levies are assessable by reference to the “capital improved” value of land. If the kit is not “land” or is not owned by the freehold owner, the capital improved value ought not to include the value of the kit.
This delineation can have a significant impact on the sums lawfully recoverable by authorities. Municipal valuations of land could be inflated if value is attributed to the kit on the basis that it is a ‘fixture’ and thus land. Electricity companies could find themselves liable for higher rates and levies imposed on the basis of such valuations if, under the relevant lease, they are liable to reimburse statutory outgoings imposed on the land.
Restructure or sale
Ownership of the kit also affects the requirements for a valid sale or transfer of the kit. If ownership of the kit has passed to the landowner, then the landowner’s consent would be required to any sale or transfer of the kit.6 In the authors view, a good approach is to include a clause in the relevant lease that the landowner consents to the kit being disposed during the term of the lease.
Absent consent in those circumstances, the best that can be conveyed on sale is the right under the lease to use the kit and to sever the kit from the land (together with the entitlement to the severed chattels that arises on severance).
It is important for electricity companies to seek advice on who owns the kit and whether the kit is to be properly characterised as a fixture. With early consideration and appropriate drafting of the relevant lease, potential complications can be avoided. The treatment of kit constructed on easement land will be the subject of a separate instalment.