Fixtures: Personal or Real Property?

Unless defined in the policy, words are customarily given their plain, everyday meanings. Websters Collegiate Dictionary (Tenth Edition) defines fixture as: "something that is fixed or attached (as to a building) as a permanent appendage or as a structural part (a plumbing fixture) an item of movable property so incorporated into real property that it may be regarded as legally a part of it." But how "fixed or attached" must something be in order to be covered as real, rather than personal, property?

Courts have addressed the fixture v. real property issue with fairly consistent results. Often, some version of what the Michigan Supreme Court in Wayne County v. Britton (1997) referred to as the Morris test. The Wayne court, summarizing the Morris test (from a 1919 ruling in the case of Morris v. Alexander) said: "property is a fixture if (1) it is annexed to the realty, whether the annexation is actual or constructive; (2) its adaptation or application to the realty being used is appropriate; and (3) there is an intention to make the property a permanent accession to the realty.

(Constructive annexation means that removal of the personal property would leave the personal property so unfit for use that it would be unable to be used elsewhere.)

A phone system was the subject of Hoffman Management Corporation v. S.L.C. of North America Inc. (1991).

S.L.C. Corp. bought a phone system located in a building the corporation hoped to buy when it was sold as a result of foreclosure. The corporations bid was unsuccessful, and the purchaser (Hoffman Management) claimed it now owned the phone system because it was a fixture under the Uniform Commercial Code.

The Missouri Appellate court disagreed and used the Missouri version of the Morris test. The central processing unit, although bolted to a wall, was on wheels, and the phone lines ran through dropped ceilings. It could easily be removed and used elsewhere, and there was no intent to make the system a permanent part of the realty. Therefore, it was personal property.

A double-wide trailer that was anchored to mortgaged property, had stone skirting on three of the four sides, porches and permanent utility connections was deemed to be a fixture in a 1991 Oklahoma bankruptcy case (Claxton), because it was constructively attached to the realty, was appropriate for the use of the realty, and the trailers owners had intended to make it a permanent part of the realty. Therefore, when the owners filed bankruptcy, they could not remove the trailer as personal property from the land.

Property may appear to meet the Morris test and still be considered personal property for insurance purposes. In the case of Prytania Park Hotel, Ltd. v. General Star Indemnity Company in 1999, the court applied Louisiana law and ruled that custom-made armoires, night stands, entertainment centers, chests of drawers, wall mirrors and luggage racks, all securely bolted to the hotel walls, were articles of furniture, and not fixtures. The U.S. Appellate Court for the Fifth District looked to Louisiana Civil Code which stated that, "Things are considered permanently attached if they cannot be removed without substantial damage to themselves or to the immovable to which they are attached." The furniture could be removed without substantial damage and so its loss was settled on an actual cash value basis instead of the replacement cost settlement that applied to real property.

A lease may be the determining factor unless a jurisdictions law or commercial code states otherwise.

Trade fixtures, that is, property installed by the lessee of a premises in order to carry out a business, are normally removable by the tenant and are, therefore, considered personal property. Thus, in the case of Outdoor Systems Advertising Inc. v. Korth, a billboard owner was entitled by the wording in the lease to remove billboards mounted on walls and roof of the defendants building, in spite of the defendants argument that the billboard structures could only be removed with difficulty through use of a crane and were therefore a part of the realty.

However, a lease may state that fixtures, including trade fixtures, become the property of the landlord if the lease is terminated because of the tenants breach.

The issue can be difficult to resolve, though, if the trade fixtures have also been used as collateral under a security agreement.

In 1975, the California Supreme Court wrestled with this in Goldie v. Bauchet Properties et al. In this case, the plaintiff, Goldie, loaned $10,000 to a lessee of property owned by Bauchet Properties, securing the loan with an interest in a packaging machine located on the leased premises. Under the terms of the lease, the lessors, Bauchet Properties, also had a security interest in all trade fixtures.

The lessee defaulted on the payment of rent to the defendants and the payment of interest on the loan to the plaintiff.

A trial court concluded that the packaging machine was a trade fixture and that plaintiff Goldie was entitled to take possession of it. But the Supreme Court took note of the lessees default in the payment of rent to the defendant and said that the nature of the defendants interest needed to be determined to settle the case. The court said that if the defendants interest was an ownership interest, because of the lease, then the state law governing real property and fixtures prevailed. But if the defendants had only a security interest, then the California Uniform Commercial Code governed and the plaintiffs security interest prevailed.

The court remanded the case to the trial court to determine the nature of the defendants interest.

But the courts intercession is often unnecessary. The first order of business is to read the policy. Had this been done in the case of Cock-N-Bull Steak House Inc. v. Generali Insurance Company (1996), the suit probably would not have been filed.

The Cock-N-Bull restaurant was destroyed by fire. Policy limits were building coverage, $500,000, and business personal property, $150,000. The insured filed a claim for $275,000 for the building, $150,000 for contents. After these amounts were paid, the insured filed a claim for an additional amount of $56,000 for equipment and machinery, including a walk-in refrigerator.

The insurer declined to pay this amount, saying the limit for contents was paid. The Supreme Court of South Carolina looked at the policy, which stated that personal property used to service the building, including appliances used for refrigerating, clearly fell under building coverage, and thus the additional amount was to be paid.

Diane Richardson, CPCU, is associate editor of the FC&S Bulletins, published by the National Underwriter Company in Erlanger, Ky. The FC&S editors welcome comment and questions and may be reached by fax at 859-692-2293 or via e-mail at FCS@NUCO.COM.

Reproduced from National Underwriter Edition, July 14, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved. Copyright in this article as an independent work may be held by the author.