In a recent decision from the BC Court of Appeal, the court once again had to struggle with the often difficult issue of what is a "chattel" and what becomes a "fixture" during the course of a commercial tenancy. In the result, the court confirmed that the test of a chattel v. fixture is not a subjective one, but rather is objective. Accordingly, although parties to a commercial lease may be able to agree on what can or cannot be removed from the leased premises at the end of the lease, that will not be determinative of the rights of others, including, for example, assignees.
One of the leases that was the subject of this litigation was entered into in 2007 (the "2007 Lease") between a landlord and an original tenant of the property (the "Original Tenant") who agreed to operate a blueberry field thereon. The Original Tenant leased the property until July 2010 when it sold its business to a new tenant, its former employee. The 2007 Lease was purportedly assigned on that basis as part of the transaction. The landlord and the new tenant (the "New Tenant") entered into a further lease in 2010 (the "2010 Lease") on terms identical to those of the 2007 Lease. The New Tenant operated the blueberry farm until 2012 and then resold the business, including the 2010 Lease, back to the Original Tenant. Eventually, the Original Tenant and the landlord had a dispute about whether there had been an abandonment of the property and the landlord refused the Original Tenant back onto the land in order for it to remove the blueberry plants it had planted pursuant to the 2007 Lease. At trial, the court held that the blueberry plants were chattels not fixtures and awarded the Original Tenant damages for conversion.
The landlord appealed. The Court of Appeal addressed the first issue which was whether the blueberry plants were chattels or fixtures and how the parties had addressed that matter in the relevant leases. The court said this at paragraph 17:
"I agree with the judge that the intention of the parties as expressed in clause 8 of the leases was that [Original Tenant] was to reclaim the blueberry plants on termination of the lease. I do not agree that this made the blueberry plants chattels."
The court then recited the oft mentioned (yet difficult to apply) test for a chattel vs. fixture, including referencing secondary sources which provided that whether or not a chattel becomes a fixture cannot be conclusively controlled by contract. Whether an object is a chattel or a fixture is determined by operation of law. The court went on to hold that the blueberry plants in this case were planted to grow berries, developed root systems, and matured to facilitate the commercial production of blueberries – thus they became fixtures. The Court of Appeal also noted that because the trial judge appears to have concluded the lessee was entitled to remove the plants at the end of the lease as per the contract, the parties intended the blueberry plants to retain their status as chattels. However, it concluded that the intention of the parties is not relevant on this issue. Ultimately, the court held that the removal of the plants at the end of the lease may return them to their status as chattels but that does not mean they were not fixtures prior to that time. The plants were clearly affixed to the land and the fact they were to be removed at the end of the lease does not inform their characterization as fixtures or chattels during the term of the lease.
That was not the end of the matter though because the New Tenant was a stranger to the 2007 Lease because of a clause prohibiting assignment. The 2010 Lease also prohibited the New Tenant from assigning the lease to anyone including back to the Original Tenant and, therefore, the Original Tenant could not acquire the right to remove the plants from the property at the end of the 2010 Lease. In other words, the Original Tenant could not obtain the New Tenant's rights under the 2010 Lease as against the landlord in order to remove the blueberry plants.
This is yet another example of our courts struggling to determine objectively what is a fixture and what remains a chattel. The difficulty, in part, stems from the fact that the answer will almost always depend on the circumstances. To avoid potential ambiguity, it may be prudent to insert into commercial leases what items can or cannot be removed at the end of a lease which may then obviate having to resort to the courts for a determination. The problem the Original Tenant in the Scott case had to overcome, but was ultimately unsuccessful in doing so, was that an unauthorized assignment of the 2010 Lease to it offered the Original Tenant no protection from its terms and conditions.
As such, once again, it is clear that commercial leasing matters can often be complex especially where an assignment of a commercial lease is involved. Obtaining early legal advice in such circumstances is likely to assist in avoiding unfortunate and perhaps unexpected results.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.