If landlords want to retain tenants' additions to premises, specific wording to that effect should be added to the lease. Shirleen Kirk reports on recent court guidance.
16 January 2014
Leases often contain provisos that the tenant must fit out the premises to a certain specification.
While landlords often expect premises to be reinstated, it can be the case that a landlord has expected to retain a tenant's items that change the nature of, or add value to, the premises in question.
Legal guidance has long been clear. While a tenant's personal property can be removed from the premises on lease termination, items that have been annexed to the premises can be considered to have become part of the premises themselves. The bulkier and more inconvenient and costly an item is to remove, the more likely that a landlord can argue that the item has become part of the premises.
In the tenant-friendly judgment of Peel Land & Property v TS Sheerness Steel (2013), the High Court has restated the law and offered helpful guidance on when it is appropriate, upon termination of the lease, for tenants to remove items brought onto premises.
- The tenant covenanted, under a 125-year lease, to build a fully equipped steel-making plant and rolling mill, including installation of various individual pieces of machinery.
- The machinery on site included cranes that ran on fixed rails, a large regulator weighing 50 tonnes, two large transformers - each weighing about 100 tonnes, an electric arc furnace, two 95-tonne capacity ladle furnaces - each with ladle cars measuring five by six metres, and three cooling towers, of which it was said by the court, "it might be possible to describe the cooling towers as buildings".
- The landlord became aware of the tenant's intention to remove large quantities of the machinery. It applied to the court for a declaration that it owned the installed machinery and an order restraining removal.
- The landlord argued that the tenant had no right to remove the machinery, in part because lease obligations on the tenant to install the machinery and restricting the tenant from making alterations indicated that the items of machinery were always intended to become landlords' fixtures.
The court's approach
The court re-stated the approach to categorising items brought onto premises by tenants:
- Chattels are the personal property of a tenant
- Fixtures are chattels that have been affixed to the premises, so as to become part of it
- Some fixtures can be detached from the property and, once detached, can again be categorised as the tenant's personal property. Such removable fixtures are known as tenant's fixtures.
Categorisation as a tenant's fixture depends on the 'bulkiness' of the item, whether it was installed with the intention that it would remain personal property and be for temporary use, the difficulty of removing the item, the effect of its removal, ease by which the effect of removal can be remedied, and whether the item will remain usable. If the fixture cannot be categorised as a tenant's fixture it remains part of the premises and becomes the property of the landlord. Tenants are not entitled to remove landlords' fixtures.
Were the items of machinery chattels? The court directed that, notwithstanding the heavy and bulky nature of much of the machinery, several of the items could be categorised as chattels. These included the cranes, the regulator and the 100-tonne transformers, which rested on their own weight.
Were the items tenant's fixtures? Notwithstanding the high cost, considerable time frame and significant inconvenience associated with removing much of the machinery, several of the items of machinery were categorised by the court to be tenant's fixtures, therefore removable by the tenant.
These included the electric arc furnace, which would take three to four months to remove at a likely cost of £2 million, the 95-tonne capacity ladle furnaces, and the three cooling towers - described as "buildings" on the basis that they could "be unbolted and removed".
Did the terms of the lease override a tenant's right of removal? The court considered that the obligation on the tenant to install the machinery was not relevant to the question of whether an item was a chattel or a fixture. And the clause restricting alterations could not be read to restrict the removal of tenant's fixtures. If the intention was to restrict the tenant's right to remove tenant's fixtures the lease should have included express and clear lease terms to that effect.
The majority of the items assessed by the court were classified as either chattels or tenant's fixtures and therefore removable. The decision is heavily weighted in favour of tenants, who are likely to have the right to remove items that they have brought onto premises, notwithstanding the items' bulky or heavy nature, or the costs, inconvenience or complications associated with removing them.
Where relevant, landlords may now start to insert express provisions into leases, stating that it is agreed that certain items brought onto the premises as part of the tenant's fit-out are to become fixtures and remain on the property following lease termination. Prospective tenants may want to resist such provisions to ensure that they can retain the benefit of purchasing pricey, industry-specific equipment.
Note: This case is being appealed by the landlord and is due to be heard in the coming months.
Shirleen Kirk is an associate in BLP's Real Estate Disputes team