The law related to the chattels and fixtures debate is the law of real property. Contract law has nothing to do with it.
So, it doesn’t matter whether we are talking about an agreement of purchase and sale, a mortgage, a chattel mortgage, a financing agreement, a construction agreement, a sale and leaseback, a sale of chattel property, a postponement of security agreement, or a lease. The point is simple! Contracts between parties have nothing at all to do with the classification of items or objects as either chattels or fixtures. Real property law governs. Real property law will deal with the issue.
That causes a problem for real estate agents, since their experience in this field arises out of a contract between a seller and a buyer of land. There are clauses that list the debatable items. Oftentimes, their classification is strongly influenced by their recollection of whether such similar items had been noted as either chattels or fixtures in previous agreements. None of this is relevant.
As we have previously seen, there are 15 basic legal rules that deal with the distinction. In addition, there are numerous other small permutations which, of course, could be additional rules.
The reason behind the principles in the law of real property is the protection of innocent third parties. There are to be no secret agreements. The land is there, for all to see, and naturally conclude, one way or the other whether an object is a chattel or a fixture. It is to be evident, patent, not hidden from view, apparent for all to see. This test is objective. That adds to the certainly. No subjective intention here. The conclusion should be straightforward.
While the contract itself cannot resolve the matter of the characterization of the item, it can deal with collateral issues that may arise between the parties to the contract. But, just those parties, no one else.
So, if the seller asks to remove a fixture, and the buyer agrees, any mortgagee would have to consent as well. If it’s a fixture, then it’s pledged to the mortgagee as security. Only the mortgagee can consent to the removal. This issue will arise when a mortgage is assumed rather than discharged.
There may be a construction agreement where the contractor has the right to remove a fixture if the owner doesn’t pay. That’s not enforceable against third parties. Again, any mortgagee would have to consent. However, the owner and the contractor are free to agree to matters that only apply as between themselves. The moment there are third party consequences, we are back to real property law, and that governs the distinction.
So, the basic point here is that real property law trumps contract law when it comes to the classification.
Brian Madigan LL.B., Broker is an author and commentator on real estate matters, if you are interested in residential or commercial properties in Mississauga, Toronto or the GTA, you may contact him through Royal LePage Innovators Realty, Brokerage