Wednesday, July 13, 2011

The Supreme Court of Virginia on Fixtures: The Taco Bell Decision

It's a steamy summer day in Charlottesville, so grab yourself a zesty burrito and an ice-cold Coke, and let's talk property law!

In Taco Bell v. Commonwealth Transportation Commissioner (June 9, 2011), the Supreme Court of Virginia examined the sometimes vexing question of the legal status of restaurant fixtures. For anyone who has been involved with the lease or sale of a restaurant, Taco Bell proves an engaging read. You can link to Senior Justice Lacy's opinion here.

First, the background:

Property law distinguishes between real property (the land and certain immovable structures located on the land (the structures are known as "improvements")) and personal property (moveable items, such as furniture, books, vehicles, etc.).

Ambiguity can arise with respect to fixtures. Fixtures are initially-moveable objects which can, over time, become literally or figuratively "attached" to the land or to improvements. In the eyes of the law, a fixture is real property, even though it began its life as personal property.

For instance, consider a sink, a stove, or a kitchen cabinet: although each of these items is moveable at the time it is installed in a house or a restaurant, the sink/stove/cabinet is secured to the immoveable real estate and thereafter becomes, in the eyes of most beholders, part of the real estate (for this reason, a house-seller who intends to keep the kitchen sink after conveying the property should make very clear in the contract that the sink will be removed prior to settlement).

In Virginia, whether or not an item is a fixture (and is, therefore, classified as real property rather than personal property) is determined using the following three-part test:
  1. Has the item been actually or constructively "annexed" to the site?
  2. Is the item appropriate to the purpose for which the land is being used?
  3. Did the owner of the real property intend to make the item part of the real property?
Critics of this three-part test might point out that question 3 is quite subjective, because determining a person's intent is considerably more difficult than determining whether a stove is physically attached to a wall.  Nonetheless, the three-part test has guided Virginia courts since the Supreme Court articulated it in the 1941 decision Danville Holding Corp. v. Clement.


Now, turning our attention to the facts in Taco Bell:

Using its eminent domain power, the Commonwealth of Virginia initiated a taking of a Taco Bell restaurant located on Route 29 in Fairfax County. The purpose of the take was to widen and repair Route 29.  Because the restaurant owners and the Transportation Commissioner could not agree on the value of compensation to be paid by the state to the property's owners, the Commissioner initiated a condemnation proceeding.

During the condemnation proceeding, the question arose whether Taco Bell's owners should be compensated not only for the building but also for certain items that the owners considered to be fixtures.  The items in dispute included a refrigerator, a freezer, sinks, ovens, pans, frying baskets, and a "drive thru" neon sign.

The Circuit Court of Fairfax County held that the disputed items were "purely personal property" and that there was no need for a factual determination by the jury because the evidence conclusively showed that the items could be removed from the property.  Since the items could be removed, they were not fixtures, and the owners were not entitled to compensation from the state for them.

The Taco Bell owners appealed, and the Supreme Court of Virginia reversed the Circuit Court.  In her opinion, Justice Lacy states that the Circuit Court incorrectly applied only one of the three prongs from the fixture test articulated in Danville Holding Corp. The Circuit Court focused exclusively on the moveability of the items, when it should have also focused on (1) the owners' intent and (2) the appropriateness of the items. Lacy writes:
"Taco Bell presented testimony that it intended that the items remain on the property for the life of the business or ... there was an 'intent to make such machinery and equipment a permanent accession to its realty' ... Considering the evidence in the light most favorable to Taco Bell, as we must on appellate review, we conclude that the evidence on the issue whether the items in question were fixtures or personalty for condemnation purposes was sufficient to submit to the jury."
The decision in Taco Bell is surprising in that it leaves open the possibility that certain items not generally considered fixtures (in particular, the pans and the frying baskets) may actually be fixtures in certain situations, depending on the parties' intent and the context in which those items exist. 

One interpretation of the decision is that, when it comes to questions about what constitutes a fixture, the Supreme Court of Virginia believes that juries should have the opportunity to assess the particular facts at issue.

OK, that's enough law for today --- now it's time to eat some tacos!!!