Restaurants spend huge amounts of money on special equipment and trade fixtures, such as refrigerators, stoves and ovens, to build out a space. When a restaurant space is leased, who owns these assets: landlord or tenant? Restaurant tenants should be sure to focus on this important term when negotiating a restaurant lease.
Commercial landlords often present restaurant tenants with form leases which provide that furniture, trade fixtures and equipment (FF&E), including all trade fixtures, will become a part of the leased premises (read: the landlord’s property), even when they are paid for by the tenant. Such improvements create value for the landlord, and secure the tenant’s performance under the lease. Alternatively, some landlords may seek a security interest in the tenant’s FF&E rather than outright ownership of them.
Restaurant tenants, however, should negotiate aggressively concerning ownership of the restaurant’s FF&E. They are usually an important component of the restaurant’s value, and are especially relevant in connection with the financing or sale of the restaurant. (An owner may need to pledge these assets to their lender or investors to secure financing for the restaurant).
Because of the substantial value of FF&E, most restaurant leases include provisions clarifying ownership of FF&E, but what happens if the lease is silent? In such a case, the question of ownership of a particular item usually comes down to whether it is a fixture or a “trade fixture”. Trade fixtures generally remain property of the tenant; while other fixtures generally become property of the landlord. (Items not physically attached to the leased premises generally remain property of the tenant).
A fixture is something that has become physically attached to the leased premises such that its removal would damage the property. Area rugs, for example, are not fixtures, but wall-to-wall carpeting may be, and a furnace almost always will be. Trade fixtures are a subset of fixtures. Broadly speaking, trade fixtures are fixtures purchased by a commercial tenant, used in the normal course of the tenant’s business, and are deemed to remain personal property of the tenant even though affixed to the leased premises. Courts have looked to a variety of factors when trying to determine whether a particular item is a trade fixture, including, (1) whether the parties intended to make the fixture a permanent part of the premises, (2) how the fixture is attached to the premises; and (3) the extent of the damage to the premises that will result from fixture’s removal. Trade fixtures can be substantial pieces of equipment.
No restaurant tenant should let the matter be determined by the common law. Each should insist upon a lease that specifically addresses ownership of FF&E, such as refrigerators, stoves and ovens.
