In a fix: tenants, landlords and chattels

Posted: 30/04/2014

What happened?

TS Sheerness Limited (TSS) was the tenant of a steel recycling plant under a 125 year building lease and Peel Land and Property (Ports No.3) Limited (Peel) was the current landlord. Convinced that the tenant intended to strip the property of valuable plant in order to sell it, Peel applied for a declaration that it was the legal owner of the whole plant.

The ownership of the plant, 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 within 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 property on 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.

High Court ruling

The judge ruled that most of the items of plant were either not annexed to the land (and so remained tenants’ chattels) or tenants’ trade fixtures. In both cases, 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.

Court of Appeal

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 on 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 within it, whether landlord’s or tenant’s
• 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.

Comment

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 Limited [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. In Peel, the semantic arguments could probably have gone either way, which is possibly why the Court of Appeal fell back on the commercial purpose test.

Implications of the decision

• On the grant of a lease, the parties should give careful thought to ownership of 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 since 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.
• Peel also provides an important warning to anyone taking over a lease in order to realise an insolvent tenant’s business assets, as was the case here. Thorough due diligence including, possibly, counsel’s opinion is essential to establish ownership of valuable assets.

This article was published in Solicitors Journal in March 2014.

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