It is well known that “an appropriation of land … is an appropriation of all that is annexed to the land, whether classified as buildings or as fixtures …” and that “[t]he value of the fixtures ought, therefore, [be] considered in estimating the total value of the property appropriate by the State.” Jackson v. State of New York, 213 N.Y. 34, 36 (1914). The so-called “trade fixture rule” holds that a claimant is entitled to compensation for trade fixtures it has a right under its lease to remove, but chooses not to remove. The trade fixture owner is entitled to the current sound value of the trade fixture at the time of vesting, but the award cannot be a windfall. See Id. at 466.
To be a trade fixture, an item must pass the “three part test” of annexation, adaptability, and intention of permanency. Some elaboration may be helpful: The question for annexation is no longer whether the item is physically attached to the land, but rather whether it is “constructively annexed.” Adaptability contemplates “both fitting the chattel to the particular purpose of the freehold, and the necessity of the chattel to the particular purpose of the freehold.” Finally, the intention that the attachment be permanent prong requires the court to take an objective interpretation of the installer’s intentions at the time of attachment (whether or not the item could be removed is not relevant.) In re City of New York, 11 N.Y.3d 353 (2008). A more recent addition to this test is that the trade fixture must be an item that “would lose substantial value if removed even though readily removable.” (Village of Portchester at 467, citing Matter of City of New York [Merrimaker Corp.] 51 A.D.2d 147, 149).
In re Village of Port Chester, 42 A.D.3d 465 (Sup. Ct. App. Div. 2007), was decided the Appellate Division for the Second Department in July of 2007. The Village of Port Chester had obtained title by eminent domain to property where the claimant, Megamat Laundramat Inc. (“Megamat”), operated their laundromat. At the Appellate Division, Megamat was appealing a $993,921 award rendered by the Supreme Court of Westchester County as being inadequate. The award included compensation for, among other things, laundry machines, a steam presser, televisions, and a satellite dish. The Appellate Division held that the laundry machines would be damaged mechanically and lose at least 80% of their value if they were removed, thus, they were compensable trade fixtures. However, the court found that the trial court’s total Current Sound Value (CSV) award to the claimant constituted a windfall because the award was nearly twice the original cost to the claimant for constructing and equipping the laundramat in November 1997. Finally, the court held that the trial courts award for current reproduction cost of $6,000 for a steam presser was improper in that the claimant had admitted that the correct current reproduction cost (CRC) was $795. Lastly, the court held that the television sets and satellite dish were not trade fixtures, and reversed the lower court’s award for those items.
Thereafter, the Court of Appeals took a firmer stance on defining compensable trade fixtures in In re City of New York, 11 N.Y.3d 353 (2008), aka “the Kaiser Woodcraft case.” The claimant was a woodworking shop whose claimed trade fixtures consisted of standard industrial woodworking tools and heavy-duty hand tools. Many of the tools were very heavy and required the installation of beams beneath the floor to support their weight. Others required the installation of electric wiring to provide the necessary power for their operation. The tools were arranged in a way so as to maximize efficiency of production. Under the semi “fourth” prong of the trade fixture test articulated in Rose v. State of New York, 298 N.Y.S.2d 968 (1969) (“those improvements which are used for business purposes and which would lose substantial value if removed”), the claimant tried to argue that the large machinery would lose substantial value because (a) it would sell for less on a second hand market and (b) it was part of an integrated workplace physically ordered to maximize efficiency and mirror the flow of labor. The Court of Appeals responded that “use in connection with a business is not the test of compensability in New York, nor is efficiency of operation. The common thread of items qualifying under the ‘substantial loss’ category of compensable fixtures is devaluation of functional utility if the item is removed.” In re City of New York, 11 N.Y.3d 353, 363 (2008).
Therefore, taken together, these cases demonstrate that trade fixtures are items used in connection with the business that would lose functional utility if removed and are not just part of an integrated workplace designed constructed to maximize economic output. An item that is usable and would not lose value or functional utility if removed is unlikely to qualify. Is this the appropriate test? On the one hand, taxpayer money should not be expended to constitute a windfall for the claimant, but on the other hand, should the work working shop in Kaiser Woodcraft have had to incur the cost of storing the heavy machinery that it had purposefully installed in the building, constructed beams in the floor to anchor, and dedicated electric wiring to it? Should loss of functional utility be the proper test?