Updated on August 4, 2023
It is not a typical for commercial tenants to heavily invest into their leased premises to better suit the needs of their business. An issue arises, however, when these same tenants, for whatever reason, decide to relocate to another location at the end of the lease term. Without the protective contractual terms in place, these tenants risk losing most if not all of the investments they made to the real property. By default, any improvements that tenants make to the premises, which become an integral part of the premises, belongs to the owner. (See Cal.Civ.Code § 1019.)
Before entering into a lease, tenants can limit the scope of the default rule in the lease itself. For those tenants already in contract, the trade fixtures doctrine may provide some relief. In essence, if an improvement/investment is considered a trade fixture in real property, then tenants are generally allowed to take them back by removing them from the property.
The relevant statute provides, “a tenant may remove from the demised premises, any time during the continuance of his term, anything affixed thereto for purposes of trade, manufacture, ornament, or domestic use, if the removal can be affected without injury to the premises, unless the thing has, by the manner in which it is affixed, become an integral part of the premises.” (Cal. Civ. Code § 1019.) Machinery, equipment, and other items of personal property that tenants attach to the leased commercial are examples of trade fixtures that tenants can probably remove.
Trade fixtures do vary though from business to business. Thus, there is no set list of trade fixtures in real estate that tenants can turn to determine what they can or cannot remove. Rather, that determination ultimately boils down to the intent of the tenant. (Banks v. Clintworth (1962) 201 Cal. App. 2d 789, 794.) The question becomes, Did the tenant intend for the improvement to become a fixture of the premises? (See id.) If yes, then the improvement belongs to the landlord.
Overall, courts side with tenants to avoid a forfeiture of the improvement. (See Roberts v. Mills (1922) 56 Cal. App. 556, 560.) Courts weigh the fairness of allowing the tenant to retain their investment against the potential unrepairable loss owners may incur if the improvements are removed. If the latter, the courts forbid removal. (Gordon v. Cohn (1934) 220 Cal. 193, 194.)
On the other hand, if the damage done to the real property by the removal can be recompensated, then courts allow the removal subject to the tenant paying the owner for the damage. (Beebe v. Richards (1953) 115 Cal. App. 2d 589, 592.) In Goldberg v. Stanton, for example, the tenant removed the refrigeration units in a grocery store even though the roof and walls were damaged. The court allowed the removal only because the tenant paid the landlord for the damages. (Goldberg v. Stanton (1927) 84 Cal. App. 665, 669.)
See related: Ownership of Fixtures