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Alterations and Improvements Clause

In most form leases there is a provision similar to Clause 3 of the Real Estate Board form lease known as the “alterations and improvements’ clause.” Although they vary in detail, the essential part of the clause provides that “all alterations — installations and additions or improvements upon demised premises made by either party — shall become the property of landlord, and shall remain upon, and be surrendered with said premises, as a part thereof, at the end of the term or renewal term as the case may be.”

The question then, with respect to tenants installations, is where there is such a clause, in the event of a condemnation proceeding, are they fixtures for which a tenant may receive compensation or have they become the property of the landlord for which he receives the compensation?

Court Interpretation

Courts generally, in interpreting this clause, have treated it as simply declaratory of the common law. At the common law the same property may be treated differently as between different parties as to whether on installation it becomes realty or personalty. While a particular installation might be treated as part of the real estate, as between a vendor and vendee of the real estate, that very same property might at the same time be considered personalty as between the landlord and the tenant. Since the vendor-vendee test is applied between condemnor and condemnee, and the test is different between landlord and tenant it is usual to find that property installed by a tenant is deemed a compensable trade fixture as part of the real estate while at the very same time as between the landlord and tenant it is deemed the property of the tenant. McCrea v. Central National Bank of Troy, 66 N.Y. 489 (1876).

In conflicts between the landlord and tenant the question as to whether it is realty or personalty is resolved by the effect to be given to the agreement between the parties as to the intention to make the installation a permanent accession to the property Murdock v. Gifford, 18 N.Y. 25 (1859). Courts have not treated the usual alterations and improvements clause as declaratory of an intent to make the installation the property of the landlord if the nature of its installation did not otherwise make it so.

Ruling Cited

In U.S.A. v. Certain Lands Located in the Borough of Manhattan 306 F. 2d 439, 449 it was stated:

“Some fixtures, even though annexed by the tenant are ‘distinctively realty’ and therefore become the property of the landlord; others which are removable without material injury to the freehold remain the property of the tenant even though they are classified as realty because they are severely damaged or lose substantially all their value on severance. Examples give meaning to the distinction. Asphalt cemented to the floor by the tenant belongs to the owner. But ‘sectional moveable and interchangeable partitions’ specially adapted to the building but removable without injury to it are realty belonging to the tenant.”

“Machinery which is sufficiently annexed to be fixture within the Whitlock Avenue case is ordinarily ‘realty’ which belongs to the tenant. Similarly, wiring and pipe are the kind of ‘realty’ which remains the property of the tenant ‘where those items have no connection with the operation of the building and serve to purpose but the proper functioning of the tenant’s fixtures, and are a part of the fixtures instead of the building.'”

In 344 F. 2d 142 the court, clarified further to above in stating: “We may well have misled Judge Dimock by our statement that ‘asphalt cemented to the floor by the tenant belongs to the owner.’ This would be true if the asphalt became the only floor or integral with it, but we see no good reason for distinguishing a covering of asphalt tiles, removable without damage to the basic structure or a false ceiling similarly removable, from the partitions held to belong to the tenant in the Century Holding Case.”

Clause Discussed

The court in 306 F. 2d 439, then went on to discuss the alterations and improvements clause. “This distinction between improvements made by the tenant which became the landlord’s property and those which remain the tenant’s, even though considered ‘realty,’ is not changed by the standard alteration provision. This clause, with or without the exception for moveable trade fixtures, adapts and perhaps, very slightly extends the New York concept of fixtures which though annexed by the tenant are ‘distinctively realty’ — The New York courts bearing in mind the purpose of the law of fixtures ‘to protect those who, having an estate less than a fee in land had made improvements upon which, if they could not retain, would be lost to them’ have taken a generous view of what may be removed without injury to the freehold and is excluded from the standard alterations clause.”

The interpretation of this clause was also treated with in In re Howard Laundry Co., 203 Fed 445 (2d Cir. 1913) where it was stated that “This clause was simply declaratory of the law and gave the landlord no additional right to articles found to be trade fixtures. It was undoubtedly intended to cover permanent additions to the buildings and not personal property which for business purposes is a temporarily and detachably fastened to the floor or ceiling of a building.

“The presumption is that trade fixtures belong to the tenant and if it be the intention of the parties that they shall become the property of the landlord at the expiration of the lease, that purpose should be stated in language so clear and explicit that there can be no doubt as to its meaning. That intent cannot be deduced from broad and general language, which is usually found in the printed forms, regarding improvements. When this word is used without any language defining or extending its ordinary meaning, the courts, with substantial uniformity have held that it relates to improvements to the realty and not to trade fixtures.” (See also In re Seward Park Slum Clearance Project, 10 A.D. 2d 498 (1960), In re Mount Holly Paper Co., 110 F. 2d 220, 225 (3rd Cir. 1940).

No End to Term

Although condemnation acts to terminate the lease, this is not deemed, for the purposes of this clause, such an end to the term as forfeits the tenant’s installations to the landlord. Gristede Bros., Inc., v. State of N.Y., 11 A.D. 2d 580 (3rd Dept. 1960); U.S. v. Seagren, 50 F. 2d 335.

The law is full of cases where there was an endeavor to protect a tenant as to his installations and to prevent a forfeiture to the landlord whether there be an alterations and improvements clause or not. Ombony v. Jones, 19 N.Y. 237; Webber v. Franklin Brewing Co., 123 App. Div. 465 (1st Dept., 1908), aff’d on opin. below 198 N.Y. 509; Excelsior Brewing Co. v. Smith, App. Div. 668 (2d Dept., 1908); Century Holding Co. v. Pathe Exchange, 200 App. Div. 62 (1st Dept. 1922); Lewis v. Ocean Navigation and Pier Co., 51 Hun 644, 3 N.Y.S. 911, aff’d 125 N.Y. 341; Bernheimer v. Adams, 70 App. Div. 114 (1st Dept., 1902), aff’d 175 N.Y. 472.

The result then is that in condemnation proceedings, the alterations and improvements clause is in effect ignored and the ordinary common law rules applied.

Reprinted with permission from the November 6, 1975 edition of the New York Law Journal © 2010 Incisive Media Properties, Inc. All rights reserved. Further duplication without permission is prohibited.