Tag Archives: commercial lease

Let’s examine who owns the fixtures at lease expiration. In order to facilitate a smooth transition between commercial tenants, it is important for landlords to understand their rights regarding items attached to their property. Generally, a lease will govern these rights. However, if the lease is silent on the issue, articles annexed to the property deemed “fixtures” must stay with the property, while articles deemed “trade fixtures” may be removed by a vacating tenant.

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In New Jersey, a fixture is an object that “become[s] so related to particular real estate that an interest… arises under real estate law.” N.J.S.A. 12A:2A-309(1)(a). In contrast, an article may be considered to be a trade fixture if: (1) the article is annexed to the property for the purpose of aiding in the conduct of a trade or business exercised on the premises; and (2) the article is capable of removal from the premises without material injury thereto. Handler v. Horns, 2 N.J. 18, 24-25 (1949). As such, an important distinction between fixtures and trade fixtures is whether removal of the item will cause material injury to the premises. See e.g.
GMC v. City of Linden, 150 N.J. 522, 534 (1997). In applying this test, courts infer that if removal of an article would cause material injury to the premises, the parties must have intended for the article to remain beyond the lease term. Id.

A typical conflict involving this nuanced distinction may involve a vacating tenant removing an item from the leased premises under the assumption that it was (1) attached to the premises for the purpose of conducting a trade or business; and (2) capable of removal without material injury to the premises. A landlord may dispute one or more of these assumptions, arguing that the article was not used in the conduct of business (that it was in fact attached to improve the structure) or is not capable of removal without material injury to the premises.Over the years, vacating tenants have attempted to remove countless items from leased premises, including air conditioning systems, irrigation systems, bolted down light fixtures and even circuit breaker panels, by arguing these items were trade fixtures. See e.g. In re Jackson Tanker Corp., 69 B.R. 850 (Bankr. S.D.N.Y. 1987).

However, it isn’t difficult to imagine a hypothetical where the traditional landlord and tenant arguments are reversed – that is, where the tenant argues that the article must remain with the property and the landlord argues that the tenant is responsible for its removal. This unusual fact pattern may especially arise where the tenant’s business is specialized in nature, and where equipment is not easily removed from the premises.

For example, Landlord rents out space to Tenant, who plans on operating a restaurant. The lease does not specifically address what does and does not constitute a trade fixture. Tenant plans on installing a walk-in freezer and other specialized, complex systems. After several years of operating, Tenant declines to renew the
lease, closes, and vacates the premises. Tenant removes the furniture, appliances not fixed to the premises and other items it deems to be trade fixtures and leaves the walk-in freezer infrastructure. Tenant refuses to remove the walk-in freezer, arguing its removal will cause substantial damage to the premises. Unable to re-let the premises to a restaurant tenant, Landlord is left with a walk-in freezer occupying a substantial portion of the premises. It is important that during the lease negotiation, landlords think carefully about the business their prospective tenant is in, the kinds of equipment the tenant will install and what will happen to that equipment upon termination of the lease. This same thought process applies when landlords receive requests for alterations. In the above hypothetical, Landlord could have avoided being left with a walk-in freezer and a less than desirable space if it addressed the issue during negotiation of the lease. A discussion with prospective tenants concerning the specific kinds equipment the tenant will install is always a good idea, followed by specifications and drawings for approval. Landlords are wise to reduce these conversations to writing, and specifically address each party’s expectations regarding the disposition of specific equipment when the lease inevitably comes to an end. As always, an ounce of prevention is worth a pound of cure.

The contents of this article are for informational purposes only and none of these materials is offered, nor should be construed, as legal advice or a legal opinion based on any specific facts or circumstances.

William F. Hanna, Esquire
Hyland Levin Shapiro LLP
hanna@hylandlevin.com
Hyland Levin Shapiro LLP
6000 Sagemore Drive, Suite 6301
Marlton, NJ 08053-3900
(p) 856.355.2900

A personal lease guaranty is a crucial feature of many commercial real estate leases. A lease guaranty is a separate contract under which a third party guarantor agrees to meet the obligations of the Tenant to the Landlord. Landlords understandably want to ensure that their Tenants – be they individuals or business entities – have the financial wherewithal to meet the obligations set forth in the lease. If a Tenant without sufficient assets breaches its lease by leaving early, refusing to pay rent, or damaging the space, the Landlord will not be able to recover its damages. The Landlord may have nothing to collect against. For this reason, if a Landlord is unsure about the creditworthiness of a potential Tenant, it will often demand that the Tenant provide a guaranty from an individual or entity who has sufficient assets to secure the Tenant’s obligations.

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A lease guaranty is a separate contract under which a third party guarantor agrees to meet the obligations of the Tenant to the Landlord. If the Tenant fails to pay rent, the Landlord can recover the arrears from the guarantor, usually before seeking damages from Tenant. Depending on the scope of the lease guarantee, the guarantor may also be financially responsible for damage to the lease premises caused by the Tenant. In the case of a Tenant entity (i.e. a corporation, limited liability company, or partnership), the guarantor is typically one of the entity’s principal individual owners or a corporate affiliate. In the case of individual Tenants, the guarantor is typically a family member or an investor.

In order to be enforceable, a lease guarantee should state the guarantors’ obligations in clear unambiguous language.

It should explicitly address which obligations the guarantor is securing, how and when can the Landlord collect from the guarantor, and whether there are monetary or temporal limitations to the guaranty. Any ambiguities will be construed in favor of the guarantor. The guaranty should also address the issue of consideration for the guaranty and make clear that the Landlord is entering into the lease in reliance on the guaranty. Finally, the guaranty should be signed by both Landlord and guarantor.

Many commercial Landlords insist upon a lease guaranty up front, but do not then consider how subsequent lease amendments, modifications, or renewals may affect the validity of the guaranty. This is a dangerous mistake. In certain states, a lease guaranty may be limited or even voided if the underlying lease is in any way modified without the guarantor’s express consent.

New Jersey courts take a more nuanced approach to this issue. In New Jersey, a lease guaranty will only be limited or discharged if the lease is subsequently modified in a way that injures the guarantor or actually increases the guarantor’s risk or liability. See Center 48 Ltd. Partnership v. May Dept. Stores Co., 355 N.J. Super 390, (App. Div. 2002). Unfortunately, New Jersey courts have not provided much guidance on what sort of lease modifications actually increase the guarantor’s risk or liability.

Nonetheless, Landlords in New Jersey can take two steps to limit the chances that a lease guaranty will be limited or voided if the underlying lease is subsequently changed. First, the Landlord can include clear language in the lease guaranty stating that the guarantor’s obligations will extend to any increase in rent, extension of the lease term, renewal, or other modification of the lease. The broader and more specific the language the better for the Landlord. The lease guaranty should also explicitly waive the guarantor’s right to consent to such modifications. A second and more effective approach is for the Landlord to require the guarantor to provide a written acknowledgment and consent each time the lease is amended, modified, or renewed.

Lease guarantees provide crucial credit support to commercial Landlords. In order to ensure that a guaranty is enforceable, however, a Landlord must use a carefully drafted form. Simply getting a well drafted lease guaranty executed, however, is not the end of the story. A Landlord must also consider how subsequent lease amendments may affect the enforceability of the lease guaranty and work proactively to ensure that the lease guaranty remains in effect, especially when it comes time to enforce it.

The contents of this article are for informational purposes only and none of these materials is offered, nor should be construed, as legal advice or a legal opinion based on any specific facts or circumstances.