Who Owns Fixtures Attached To Leased Commercial Real Property In Arizona?

In Arizona, courts use the following three-part test to determine when a chattel has become a fixture: (1) “[t]here must be an annexation to the realty or something appurtenant thereto;” (2) “the chattel must have adaptability or application as affixed to the use for which the real estate is appropriated;” and (3) “there must be an intention of the party to make the chattel a permanent accession to the freehold.” id. at 101, 764 P.2d at 1160 (quoting Fish v. Valley Nat’l Bank, 64 Ariz. 164, 170, 167 P.2d 107, 111 (1946) (“The mere affixing of personal property to real estate may or may not cause it to lose its personal characteristics. It may retain its identity as a chattel personal and not become a chattel real. The rule is that for a chattel to become a fixture and be considered as real estate, three requisites must unite ...”).

This three-part test applies when the parties have not entered into an agreement that characterizes the subject item as personal or real. id. at 101, 764 P.2d at 1160 (citing Gomez v. Dykes, 89 Ariz. 171, 359 P.2d 760 (1961)).

The most important part of the three-part test is the parties’ intention with respect to the use and adaptability of the chattel. id. at 101, 764 P.2d at 1160 (quoting Voight v. Ott, 86 Ariz. 128, 134, 341 P.2d 923, 927 (1959) (“The modern tendency is to place less emphasis on the method or mode of annexation of the chattel and to give greater consideration to the intention of the parties as respects the use and adaptability thereof.”)). See also Williams v. Long, 402 P.2d 1006, 1009 (Ariz. Ct. App. 1965) (“As between the parties, at least, their expressed intent as to whether the items would become part of the realty is controlling.”); Sulphur Springs Valley Elec. Coop., Inc. v. City of Tombstone, 401 P.2d 753, 758 (Ariz. Ct. App. 1965) (“chief factor to consider” is “the intention of the annexor”).

In determining the parties’ intention, courts will examine the parties’ relationship to each other. Murray, 159 Ariz. at 101, 764 P.2d at 1160 (citing City of Phoenix v. Linsenmeyer, 78 Ariz. 378, 380, 280 P.2d 698, 700 (1955)). 

Courts must also look to the objective manifestations of the parties’ intention rather than the subjective manifestations. id. at 101, 764 P.2d at 1160 (citations omitted).

“Generally, it is presumed that where the owner of the merchandise is also the owner of the realty, permanent accession to the freehold is intended.” id. at 101, 764 P.2d at 1160 (quoting Energy Control Servs. v. Ariz. Dep’t of Econ. Sec., 135 Ariz. 20, 23, 658, P.2d 820, 823 (Ct. App. 1982)).

The general rule is that the one who asserts the affirmative of an issue has the burden of proving it. Sulphur Springs, 401 P.2d at 758. Accordingly, whoever, for example, asserts that the circumstances of an annexation made the chattels part of the realty has the burden of proof. id.

Unless a valid lease states otherwise, tenants are ordinarily entitled to remove permissible annexations, such as trade fixtures and domestic fixtures, during the term of the lease, so long as the leased property can be and is restored to its former condition after the removal. See Restatement (Second) of Property (Landlord and Tenant), § 12.2(3). See also id. Note 6(a) (citing statutes codifying tenant’s rights to remove fixtures during term of lease); id. Note 6(b) (citing statutes codifying tenant’s continued right to remove fixtures with renewed or succeeding lease); Marcos v. Texas Co., 75 Ariz. 45, 47, 251 P.2d 647, 649 (1952 (“an article which is annexed by the tenant, subject to a stipulation granting him the right of removal, retains its chattel character, as long as the right of removal continues, as between the parties) (citation omitted).

However, a “lessor, as the owner of the land, generally owns permanent improvements on the land.” Havasu Springs Resort Co. v. La Paz County, 199 Ariz. 349, 350, 18 P.3d 143, 144 (Ct. App. 2001). “‘Permanent structures placed by a tenant upon leased premises and attached to the realty are deemed to be real property and belong to the lessor.’” id. at 350, 18 P.3d at 144 (quoting Maricopa County v. Novasic, 473 P.2d 476, 478 (1970)). See also Marcos, 75 Ariz. at 47, 251 P.2d at 649 (“an article . . . may lose its chattel character, if so closely annexed as to become an integral part of the land) (citation omitted). 

Indeed, it is a class 2 misdemeanor if a tenant, or someone at the tenant’s request, removes or intentionally and materially alters or damages any permanent fixture without permission of the landlord or the landlord’s agent. See A.R.S. § 33-322.

Given the potential for a dispute to arise as to whether a fixture is sufficiently removable, and possible civil and criminal liability therefrom, the tenant and landlord should enter into an agreement regarding the ownership of fixtures, which the law entitles them to do. “The parties to a lease can treat improvements as the lessee’s by granting control over the improvement to the lessee. The sine qua non of ownership is the right to control and dispose of the asset.” Havasu Springs, 199 Ariz. at 350, 18 P.3d at 144 (citation omitted). See also Marcos, 75 Ariz. at 46-47, 251 P.2d at 649 (“As a general rule, parties as between themselves may, in their dealings with chattels annexed to, or used in connection with, real estate, fix on them whatever character, as realty or personalty, on which they may agree . . . and the law will enforce such understanding whenever the rights of third parties will not be prejudiced.”) (citations omitted).