In a fix: tenants, landlords and chattels

The Court of Appeal has considered the law governing the distinction between chattels and fixtures and the removability of tenants’ fixtures (Peel Land and Property (Ports No. 3) Ltd v TS Sheerness Ltd [2014] EWCA Civ 100).

TS Sheerness (TSS) was the tenant of a steel recycling plant under a 125-year building lease and Peel Land and Property (Ports No. 3) (Peel) was the current landlord.

Convinced that the tenant intended to strip the property
of valuable plant to sell it, Peel applied for a declaration that it was the legal owner of the whole plant.

The plant owner, however,
was not evident from the lease. The demised property was defined by reference to the “site” together with the “buildings” erected on it. But “buildings” was not defined, leaving it unclear whether the demised property included tenants’ fixtures installed in the buildings.
The tenant had covenanted:

• to erect a fully equipped steel-making plant;
• not to make any alterations except for the purposes of steel making; and
• to yield up the propertyon lease expiry with all fixtures except tenants’ or trade fixtures.

Peel argued that the alterations covenant prohibited TSS from removing plant during the term for the purpose of selling it.

No foundation

The judge ruled that most of
the plant items were either not annexed to the land (and so remained tenants’ chattels) or tenants’ trade fixtures. In both situations, TSS was entitled to remove them during the term. The judge said that very clear wording was required to oust
a tenant’s common law right to remove its trade fixtures and
the alterations covenant did
not meet that threshold.

On appeal, Peel argued that the alterations covenant was sufficiently clear and that, in any case, there was no general rule that especially clear words are required to override the common law. The Court of Appeal agreed.

TSS had relied on Woodfall: Landlord and Tenant, which
says that, if a landlord wants to restrict a tenant’s ordinary right to remove its trade fixtures, it must say so in plain language. The court examined the origin
of that statement, which was propounded by only one appeal judge in Lambourn v McLellan [1903] 2 Ch 268 and declared
it (probably) obiter and not capable of being elevated to
a general principle of law.

TSS argued that the alterations covenant did
not mention fixtures at all,
in contrast to other lease covenants, leaving it free to remove them during the term.

Acknowledging the inconsistency, the court nonetheless ruled that:

• the alterations prohibition applied to the demised property, which included the building erected by the original tenant, and the fixtures in it, whether landlord’s or tenant’s; and
• allowing the tenant to remove the plant during the term would be at odds with the central commercial obligation under the lease to erect a steel-making plant.

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 Ltd [1920] 1 Ch
326, where the landlord won.
In both cases, the court felt able to reach a decision on the wording in the leases.

Careful thought

In Peel, the implications of the decision were:

• On the grant of a lease, the parties should give careful thought to who owns the tenant’s fixtures. The position can be made expressly clear through the definition of “the 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, by itself, prevent the tenant from removing its fixtures during the term as they will not form part of the demise. Without that exclusion or similar contrary provision in the lease, tenants’ fixtures will become part of the demised property.
• Where a tenant is installing expensive trade fixtures, it should make it absolutely clear that it is retaining ownership, not only on lease expiry but also during the term. An express recital to this effect will provide a useful record of the parties’ intentions but should also dovetail all relevant lease provisions – repair, alterations, yielding up, rent review, reinstatement, user, insurance – to leave no room for doubt.
• Thorough due diligence including, possibly, Counsel’s opinion is essential to establish ownership of valuable assets. SJ

 

Deborah Caldwell is a professional support lawyer at Penningtons Manches

www.penningtons.co.uk