By Brian P. Liston
The Law Offices of Liston & Tsantilis, P.C.
“To be real; Got to be real” – The Pointer Sisters, 1986
The purpose of this article is to discuss the confusing world of real property fixtures, to understand the commercial law determination of what are fixtures in the first instance, and then, if we figure out what they are, how to have them assessed.
The statutory mandate regarding the determination of whether property was real property or personal property hasn’t changed much in Illinois. Real property has been defined statutorily as: “[N]ot only the land itself, whether laid out in town or city lots, or otherwise, with all things contained therein, but also all buildings, structures and improvements, and other permanent fixtures, of whatsoever kind, thereon.” Illinois Property Code, 351LCS 20011-130.
Permanent fixtures were usually considered to be indicated by whether or not they were attached to the building and could be easily removed without damage to the building or to themselves. Land, buildings, structures and such fixtures were real property. Everything else that was not real property was personal property.
The classification of property as either real or personal was easier in simple times. During the territorial days of what was to become the State of Illinois and for a time after statehood, the emphasis was on personal property as the tax imposed upon personalty was the main revenue producer for the territorial and state government. The tax was a tax on accumulated wealth. In such time, wealth manifested itself in the amount of personal “stuff” that an individual or entity had amassed. Land was being given away. Most buildings or other improvements to the land were meager. But the numeration of a citizen’s mules, implements, furnishings and like property was the true measure of real wealth.
Industrialization changed that. With the coming of the railroads, power plants and other industrial concerns that required not only significant investment in chattel but also in land and improvements, the importance of real estate holdings caught hold. Localities would vie for a railroad to pass through their towns not only for the transportation convenience that it would bring but also for the increase in land values that such a locational decision would cause. The emphasis shifted to real property as every household began to have furnishings, and mules and asses became cheap. See, for example, M13 through M15 of the Illinois Real Property Appraisal Manual dated 1/1/10 and distributed April of 2010.
Defining “Fixture”
The first question that needs to be answered is, “What is a fixture?” An easy question to ask but almost impossible to adequately answer without some attendant risk that you’ll be wrong. Perhaps the clearest answer (but not necessarily the most useful) was offered by Professor Steve Kippenberg.
So what then is a fixture? I have often taken the position (with my tongue in my cheek) that the cab of an elevator or the stairs of an escalator might be personal property because such items can be readily removed from the realty without damage to the realty.
My personal favorite answer is to paraphrase Potter Stewart in Facobellis v. Ohio (1964). “You take the world, you shake it, and everything that doesn’t fall off is [a fixture].”
Pithy but not helpful. A more useful definition comes out of Michigan. In Michigan, as in most states, whether personal property becomes a fixture and thereby part of the realty is determined by a three-part test:
• Is the property annexed or attached to the realty?
• Is the attached property adapted or applied to the use of the realty?
• Is it intended that the property will be permanently attached to the realty?
In re Cliff’s Ridge Skiing Corp, 123 B.R. 753 (Bankr. W.D. Mich. 1991) (chairlift is a fixture).
Finally, many authorities take the position that any and all machinery essential to the property functioning of a plant, mill or similar manufacturing facility is a fixture, or at least so presumed to be, irrespective of the manner in which it is annexed to the realty and even though it is not attached at all. This view is sometimes referred to as the “integrated industrial plant” doctrine and may represent the modern trend of decisions. See, e.g., Commonwealth Edison Co. v. Property Tax Appeal Board, 579 N.E.2d 1082 (Ill. Ct. App.1919).
The problem with this approach is that an equipment lender may need to think twice about its reliance collateral and whether to advance funds or spend a bit more time with its lawyers analyzing whether stand-alone, unaffixed (more about this word later) equipment might be considered a real property fixture under a particular state’s law. Such a conclusion might force an analysis of real property encumbrances and the need for additional intercreditor agreements that may prove expensive to obtain.
“Goods” means all things that are moveable when a security interest attaches. “Goods” includes (i) fixtures….” “Goods” includes “ordinary building materials.” See Official Comment 3 to §9- 334 of U.C.C. Article 9 permits the attachment of goods.
In summary, although defined in U.C.C. Article 9, the status of a good as a fixture is ultimately determined by real property law of the relevant state. How affixed is “affixed”? Local real estate law on this topic is, however, notoriously fuzzy. How firmly affixed to the realty is the good? When is the permanence of affixation enough? What about the intent of the parties? In addition, as discussed above, in some states anything used to operate an “industrial plant” could be a fixture.
So When is a Good a Fixture?
Courts have generally considered the following factors when determining whether a particular item has become a fixture:
• The manner in which the item is annexed to the underlying realty;
• Its adaptability to the use and purpose for which the realty is used;
• The intention of the party annexing the item;
• The difficulty of removing the item;
• The destruction caused to the realty by its removal;
• The relationship between the parties.
See Official U.C.C. Article 9-3 to §9-334.
So, in conclusion, we can give a very general framework within which to determine if “affixed” equipment is a fixture. We need to look at the method of attachment, asking whether the equipment is permanently affixed (bearing in mind that “permanently” in this context may be in the eye of the beholder). Is the equipment adaptable to the use and purpose of the real property on which it is affixed? Is the equipment usable at other locations, such as a wind turbine that can be moved anywhere there is sufficient wind? Is the equipment in question essential to the ordinary use of real property, such as a roof-mounted solar panel system that proves power to the building on which it sits? But maybe not a wind turbine on otherwise vacant land providing power to the grid? Finally, and most important, what is the annexing party’s intent? In many states, this last point is dispositive. Southern Ca. Tel Co. vs. State Bd of Equalization, 82 p.2d 422 (Cal.1938). which has been adopted in Illinois as controlling.
Brian P. Liston, a partner in The Law Offices of Liston & Tsantilis, P.C., has focused his practice in the area of eminent domain litigation, property tax appeals, and incentives for land use. He currently represents Fortune 500 companies and landowners in eminent domain and property tax litigation matters in suits filed by local, municipal, and state agencies throughout the United States. He received a B.S. from Purdue University in 1984, an M.B.A. cum laude from St. Xavier University in 1986, and a J.D. from The John Marshall School of Law in 1989. He can be reached at bliston@ltlawchicago.com.
