San Diego Commercial Leases: Avoid Arguing Over What is a Trade Fixture or a Leasehold Improvement
One of the more confusing aspects of commercial real estate law is distinguishing between what is a trade fixture and what is a leasehold improvement. However, dealing with these issues up front as part of the lease can avoid expensive litigation. A San Diego corporate attorney experienced in drafting and negotiating commercial leases should be retained for advice and counsel.
In general, if the lease is silent on these issues, then, when a lease terminates and comes to an end, trade fixtures can be taken by the tenant to the next office, warehousing, or retail location. By contrast, if the lease is silent, then anything that is deemed a “leasehold improvement,” even if done by the tenant, must be left behind. A “leasehold improvement” is something that becomes part of the real property — part of the building or land — and is legally considered to be the property of the landlord.
In simple terms, an “improvement” is something that is affixed permanently The California Civil Code, section 660, defines an “improvement” in this manner:
“A thing is deemed to be affixed to land when it is attached to it by roots, as in the case of trees, vines or shrubs; or imbedded in it, as in the case of walls; or permanently resting upon it, as in the case of buildings; or permanently attached to what is thus permanent, as by means of cement, plaster, nails, bolts or screws.”
California courts have used a three-part test when dealing with specific leases and specific equipment and improvements. The three factors are these:
- What is the physical attachment to the property?
- Is the improvement meant for or designed specifically for use with that real property?
- What is the intent of the parties to the lease?
Examples of improvements would be wall-to-wall attached carpeting, built-in shelving, some types of window treatments and the like. Examples of trade fixtures would be refrigeration units — even if very large — that are easily detached from electricity or coolant systems and moved, movable shelves and equipment, and similar.
A good lease, however, can resolve all of these issues up front. If you, as the tenant, know that you want to take certain equipment that might need to be bolted to the floor, such as an artistic printing press or a kiln, then that equipment should be specifically identified in the lease as equipment to be removed and as “trade fixtures.” The bolting down of the equipment might lead to an argument since bolting is an act of affixing to the land. Avoid the argument and deal with it at the beginning.
Likewise, if as the lease term progresses, there is some needed equipment, talk to your Lessor. If the Lessor agrees that some new equipment — a large pizza stove/oven — is to be considered a trade fixture, then there will be no problem with removal at the end of the lease.
If you cannot obtain approval from the Lessor, then either accept that the Lessor might claim ownership or purchase only moveable equipment. Your specific circumstances will determine if those are options.
Finally, note that many commercial leases actually require that the tenant remove all improvements and leave the leasehold in an “as-found” and broom clean condition. If there are provisions like that in your lease, then trade fixtures vs. improvement becomes a non-issue. All improvements and trade fixtures must be removed. Again, an experienced San Diego corporate attorney can help you understand your existing lease.
Contact San Diego Corporate Law
For more information, contact attorney Michael Leonard, Esq., of San Diego Corporate Law. Mr. Leonard focuses his practice on business law, transactional, and corporate matters, and he proudly provides legal services to business owners in San Diego and the surrounding communities. Mr. Leonard has been named a “Rising Star” four years running by SuperLawyers.com and “Best of the Bar” by the San Diego Business Journal. Mr. Leonard can be reached at (858) 483-9200 or via email. Like us on Facebook.