Fixing Property Rights in Commercial Lease Improvements
It is an invitation to a lawsuit when a lease does not clearly express your express understanding of what will and will not be removed from the premises at the conclusion of the lease. If you are not sure how your intentions should be expressed, you should consult an attorney. Disputes over what the tenant can remove can be of great importance, because the materials subject to recall can be valuable. A few years ago, one of our clients had to deal with the “midnight” removal of booths and an entire stainless steel kitchen line in his restaurant building; the defaulted tenant used wrecking bars and an acetylene torch to wreak havoc throughout the building. The impact of this looting was devastating to the property’s rental value by the owner, and it was avoidable. Another client of our firm became involved in a dispute over whether a telephone switch was removable; this single specialized equipment was worth tens of thousands of dollars. Consider the cost of copper in recent years. Not surprisingly, some tenants and landlords have had heated conversations about removing copper pipes or other copper-based products from the facility; only the scrap value of such materials is significant.
Recently, another customer became involved in a discussion about the removal of improvements to a laundry room that had thousands of dollars in specialized improvements, some of which were interior while others penetrated the roof of the building that housed the facility. The concerns of our client led to the generation of a memorandum that gave this advice, which, although certainly limited to the circumstances of the premises, gives an idea of the intensity of the facts of any analysis of which property is removable at the end of the term, when the lease itself is not clear enough on that subject:
There are three main reasons why SMITHCO cannot eliminate such lease improvements [generally identified below in 1. and 3.-6.] of the premises. First, they never belonged to the current tenant; second, the text of the lease does not allow for any elimination of the kind that, I am informed, Mr. Smith envisages; and third, the contemplated removal is contrary to the intention of the original builder-owner of the premises. Therefore, the items that Mr. Smith claims to want to remove are not, by the very terms of the lease, commercial accessories.
The lease does not contemplate that lease improvements can be removed at the end of the lease term; It is explicitly the agreement of the parties in Article 5B.-that the lease improvements paid for by the Lessor or installed by the Lessee will belong to the Lessor at the end of the lease. In fact, the lease is very clear that the Tenant’s Property (as defined in Article 10A). It only includes equipment, furniture, inventory, signs and “mobile business accessories”, and these are clearly defined by illustration (counters, shelves and mirrors) as things that slide easily off a wall or are easily removed from limited ties like screws, without the need to use cutting torches or heavy tools. Basically, mobile commercial accessories are not attached to the premises in any way other than placement or balance maintenance (watch, Mark A. Senn, Commercial Real Estate Leases, §22.4 (2003 Supplement, pages 22-20), which establishes the deliberately limiting scope of personal property included within the term “commercial personal property”).
His building was intentionally designed by its original owner for two tenants, the main one being a laundromat, and that owner, as the current owner, intended to leave it that way for future operations. Therefore, the plumbing and electrical lines on the premises were not installed for the convenience of a tenant or for a temporary purpose that could argue for their removal by the tenant at the end of the lease term. Here are some illustrations from the photos she shared with me of the interior of the laundry room that demonstrate the owner’s unmistakable intent that all items installed by her were intended to be lease enhancements rather than accessories:
1. The building owner installed a 2 “X 4” frame around a series of 24 “X 24” boxes that house the five “bulkheads”; These bulkheads are connected to the roof of the premises by the frame Y they are bolted to the ground.
2. The wall height in the facility is specifically designed to accommodate industrial size dryers.
3. The dryer-to-ceiling vents actually penetrate the roof structure to the outside; so the roof structure was designed to accommodate large ventilation pipes.
4. The water and sewage pipe is specially designed to connect to bulkheads; any removed pipe becomes scrap, with no market value other than scrap.
5. Electrical conduit is attached to electrical panels, so if the conduit is cut from any panel, that panel will be compromised, not complying with the city building code.
6. Power sources are oversized, which means there is more amperage available for facilities than would be needed for regular retail sales of goods and services. Here the owner does not intend to change the use of the building, which will be re-rented for a laundromat operation.
You informed me that the rent at the facility is substantially higher than at other comparable laundry facilities around the valley, and the reason is that the original owner intended to recoup the investment in super-infrastructure for this particular use throughout the weather. . So the owner’s intent, evidenced by the reserved rent, was to create a permanent facility for commercial laundry operations with permanent lease improvements and recoup the cost of those permanent improvements over time. And for nearly 50 years in Arizona, the intent of the parties regarding the use and adaptability of personal property has been the primary emphasis in determining which party is entitled to ownership of the accessories. see Voight v. Ott, 86 Ariz. 128, 341 P.2d 923 (1959).
Regarding the question of whether electrical wiring is a non-removable accessory, at 35A Am. Jur. 2d, Accessories, at §109 (p. 921), the author affirms this proposition: “Electrical wiring is normally considered part of real property, regardless of the other circumstances.” That seems logical from the perspective of the cabling being adaptable to future uses, even non-laundromat uses, of the facility. That same perspective is suggested by our court of appeals, which in 2005 ruled that wall-to-wall carpeting is an accessory, in Hayden Business Center Condominium Association v. Pegasus Development Corporation, 209 Ariz. 511, 105 P.3d 157 (Application 2005). So while the intent of the parties is the primary factor in determining the character of the enhancement item, the adaptability of the application and the extent of their physical attachment remain important.
The landlord’s position should be that the tenant is free to remove the following items from the premises only at the time of your move and after: stacked dryers; washer extractors; washing machines; water heaters; folding tables, coin and vending machines and chairs. And that is. Everything else on the premises is lease improvements or fixed facilities; therefore no plumbing cables or pipes or accessories of any nature, including bulkheads, should be removed.
It is not that difficult to articulate what the tenant can take out of the premises at the end of the lease term; and the parties may agree that any personal property added after the commencement of the lease to the premises (except inventory and equipment mounted on wheels or casters) that has a value in excess of a limit amount will be considered by the parties, in the absence of some written agreement on the contrary, being a permanent adhesion to the premises – and therefore becomes the property of the landlord from the moment it is installed. One of the downsides to paper form leases, of course, is that the provisions on lease enhancements versus fixtures tend to be sparse or, at the opposite extreme, so authoritarian that they jeopardize the application against a tenant for part of the owner. Therefore, landlords and tenants should discuss what the tenant will add to the premises prior to the installation of personal property, and what the tenant wants to remove at the expiration of the lease. And so avoid a donnybrook.