Effective property ownership depends on knowing what you are responsible for as a landlord. Depending on the property type held, there may be completely different responsibilities for the same thing.
For instance, trade fixtures are held to different standards depending on if a property is residential or commercial. Explore the nuances of trade fixtures in commercial real estate so that you’re prepared to handle tenants’ needs in your property.
What Is a Trade Fixture?
Trade fixtures are attached items in a commercial property that may be utilized for commercial purposes. Trade fixtures are generally affixed by the tenants, in which case property owners have no responsibility to set them up. More often than not, trade fixtures are the tenant’s personal property.
Tenants in a commercial real estate setting are businesses. Businesses have unique needs as tenants that rented commercial properties may not be equipped to address. The primary goal commercial properties serve for business is as a location where they can operate.
Generally, most commercial properties will meet this requirement alone; by offering general space accommodations, commercial property owners can appeal to multiple types of businesses.
As a result, it is incumbent on commercial real estate tenants to supply themselves with the tools their business needs to succeed independently. Trade fixtures can refer to any number of things in a business context: displays, AC units, shelving, and machinery.
Commercial real estate owners should clearly know what kinds of trade fixtures they may encounter when leasing their properties to ensure they know what to expect.
Fixture in Residential Real Estate
Trade fixtures are often confused with fixtures. There is a big difference between residential and commercial real estate from a rental property standpoint.
Residential real estate refers to zoned properties for livability; they are rented out to tenants who live in the building. Commercial properties are places of business rented by businesses.
Whereas trade fixtures generally belong to the businesses renting out the space, fixtures in residential real estate are features of the property owned by the landlord to meet or improve upon the livability standards of the property.
Because landlords own fixtures in residential real estate, they have responsibility over them; they are features of the apartment that the landlord might appeal to set the overall value of the space. Examples of fixtures in a residential real estate context may refer to microwaves, ovens, refrigerators, ceiling fans, shelving, toilets, and showerheads.
As the landlord owns them, property owners should be sure that tenants know what is and isn’t qualified as a fixture so that come move-out time, landlords keep their property from going out the door.
What’s the Difference Between Trade Fixtures and Fixtures?
The most evident difference between trade fixtures and fixtures is their ownership status: the property owner has responsibility over fixtures in a residential property, whereas the tenant has responsibility over their trade fixtures in a commercial property.
Understanding this difference is a vital part of effective property management and asset management. Every square inch of the leased space should be clearly defined throughout leasing an apartment so that both parties know where their responsibilities begin and end.
Tenants with issues with their fixtures in a residential property may call upon the landlord to address those particular items if any problems arise: residential landlords may not replace non-functional fixtures in a residential property if they stop working, including inoperable lights, broken refrigerators, and appliances.
Commercial real estate owners have no responsibility over the functionality of trade fixtures in a commercial real estate setting; it is up to the tenant to ensure that the property related to their business works.
While structural issues indirectly related to the property’s function may fall into the purview of commercial real estate owners—electrical work or plumbing—commercial real estate owners will not need to actively address issues that arise with trade fixtures in the same way that residential property owners handle fixtures.
Where Are Trade Fixtures Defined?
Every lease, be it commercial or residential, should be as straightforward as possible about the landlord’s and tenant’s responsibilities concerning the property in the building. In the case of trade fixtures, there may be uncertainty regarding specific items in the building. It is in the property owner’s best interest to clearly define ownership of trade fixtures within the lease.
For example, a residential lease will likely outline the exact responsibilities property owners have over owned fixtures in the space: does the space come with a refrigerator, a washing machine, and other appliances?
Some trade fixtures blur the line between tenant and landlord ownership. A/C units can become a contentious area of ownership. By clarifying in the lease what attached items belong to the landlord, property owners can avoid the headaches of claimed ownership over these items if the tenant moves out.
Alternatively, outlining what attached items belong to the property owner in the lease clarifies what doesn’t belong to them. Abandonment refers to attached items belonging to tenants left behind on the property after they move out.
If a tenant moves out without removing certain trade fixtures, property owners may have to claim abandonment of those items, in which case property owners protect themselves from legal repercussions of handling those properties from that point forward.
Why Is Understanding Trade Fixtures Important?
Understanding the exact delineation of trade fixture ownership between tenants and landlords is a massive part of establishing a landlord’s responsibilities.
Because landlords are not responsible for the tenant’s trade fixtures, it is essential to determine where the landlord’s responsibilities begin and end regarding their maintenance. Landlords can see potentially disastrous consequences over legal claims on these attached items without those clearly defined boundaries.
Suppose a tenant files for a tenant improvement, the lines between ownership of associated trade fixtures can be confused. Tenant improvement is when a tenant files to make a build-out on their leased property. Pulling from funds allotted by the landlord in a tenant improvement allowance, tenants take on the responsibility of overseeing the construction of the planned build-out.
Where things can get confusing is who claims ownership of certain “attached items” on the build-out. Now that the tenant has invested their time, perhaps even their money, into a project, clear lines of ownership on these items can save time, money, and headaches if the landlord enters a legal dispute with their tenant.
Example of Tenant Improvements
Suppose a tenant decides to construct shelving units in a leased commercial space. Because these units are attached items to the property built with the tenant’s money, they would qualify as trade fixtures.
Should the tenant fail to disassemble these shelving units and leave them on the property when they move out, the landlord could file legal ownership over them by claiming abandonment. In that case, they could either take ownership or legal action against the tenant for monetary restitution to have them removed.
Alternatively, if a tenant pays to upgrade critical structural components to the building, like windows, the tenant may not be able to claim them as trade fixtures.
Window installation is an excellent example of how setting clear guidelines on what qualifies as trade fixtures and what doesn’t in the lease before signing can resolve potential legal disputes before they begin.
Understanding Trade Fixtures Is a Key Component of Commercial Property Management
Ambiguity has no place in a commercial real estate lease. A complete understanding of trade fixtures and their role in a commercial property is crucial in creating a watertight lease that protects a property owner from legal disputes.
The clearer a commercial real estate lease is on matters like trade fixtures, the better-situated property owners will be in maximizing their return on their highly lucrative investment assets—just as crucial to a favorable return is an advantageous commercial real estate loan.
