Court Adjudicates Consequences of Tenant’s Removal of Improvements Made by Landlord

Commercial leases often require the tenant to vacate and deliver the space back to the landlord at the end of the term in the condition of the premises at the beginning of the lease. But, as a recent case illustrates, the landlord and tenant may disagree on whether or not certain improvements may or may not be removed where the cost of installation was shared by the parties.

Wallkill Medical Development, LLC, as landlord, and Medi-Fair, Inc., as tenant, entered into a 10-year commercial lease with regard to the ground floor of a newly constructed medical office building located in Middletown.

Pursuant to the lease, Medi-Fair, which was a medical supply business, was permitted to use the premises only for the retail display and sale of durable medical equipment, home health care, and oxygen supplies. The lease required Wallkill to complete construction of the interior of the premises according to certain plans and specifications to be prepared by Wallkill with Medi-Fair’s input, subject to Wallkill’s approval. The lease provided for an allowance to be charged to the tenant fit-up. Further, the lease provided that, in the event Medi-Fair’s fit-up costs exceeded the allowance or Medi-Fair required quantities greater than the stated fit-up entitlements or items not specified, the additional charges would be at Medi-Fair’s sole cost and expense.

As part of the tenant fit-up, Medi-Fair had Wallkill construct and install a customized sales counter and customer display unit similar to one that Medi-Fair had in place at its main facility. In the end, Medi-Fair’s fit-up work, including extra design costs and additional items such as the sales counter and customer display unit, exceeded the allowance, requiring Medi-Fair to pay Wallkill for the excess costs.

The lease required Medi-Fair to redeliver possession of the premises to Wallkill at the end of the lease term in the condition in which the premises were delivered to Medi-Fair. Nonetheless, prior to vacating the premises on November 30, 2016, Medi-Fair removed the sales counter and customer display unit.

Wallkill sued Medi-Fair and its owner, Marilyn Gitlin, and alleged that the sales counter and customer display unit was intended to be a permanent fixture of the premises and that they breached the lease by removing the sales counter and customer display unit from the premises at the end of the lease term. Medi-Fair/Gitlin interposed an answer to the complaint with counterclaims for a judgment declaring that Medi-Fair was the sole and rightful owner of the sales counter and customer display unit, which was a trade fixture, and for an award of attorney’s fees pursuant to the lease.

Upon the completion of discovery, Medi-Fair/Gitlin moved for summary judgment on their counterclaims and dismissing the complaint. Wallkill opposed the motion. In an order dated November 7, 2018, the Supreme Court granted the motion, finding that the sales counter and customer display unit “qualifie[d] as a trade fixture.” Thereafter, in a decision dated March 5, 2019, made after a hearing, the Court determined that, in accordance with the terms of the lease, Medi-Fair/Gitlin were entitled to an award of attorney’s fees in the requested sum of $16,625.50. Subsequently, upon the order and the decision, the Court entered a judgment in favor of the Medi-Fair/Gitlin aand against Wallkill declaring that Medi-Fair was the sole and rightful owner of the sales counter and customer display unit, awarding them attorney’s fees in the sum of $16,625.50, and dismissing the complaint. Wallkill appealed.

The appeals court agreed with Wallkill that Medi-Fair/Gitlin failed to establish as a matter of law that the sales counter and customer display unit was a trade fixture that they properly removed from the premises at the end of the lease term. Contrary to their contention, the fact that Medi-Fair, pursuant to the express and agreed upon terms of the lease regarding the tenant fit-up, paid extra for Wallkill to construct and install the customized sales counter and customer display unit did not, under the circumstances, make it a trade fixture as a matter of law.

Rather, read together, the articles of the lease pertaining to the tenant fit-up, alterations, and redelivery of the premises at the end of the lease term raised a triable issue of fact as to whether the parties intended items such as the sales counter and customer display unit annexed to the premises by Wallkill as part of the initial, interior construction and tenant fit-up, as compared with any post-occupancy alterations and/or additions of fixtures to the premises by Medi-Fair, to be permanent fixtures of the premises.