Case: Parties’ Agreement Determines Whether Affixed Equipment is Real or Personal Property

4-Way Electric Services, LLC v. Huntcole, LLC, 366 So. 3d 844 (Miss. 2023) (en banc). Huntcole, LLC (”Seller”) operated a business of refurbishing electric transformers. Seller and 4-Way Electric Services, Inc. (“Purchaser”), entered into an Asset Purchase Agreement (“APA”) in 2014 in which Seller agreed to sell to Purchaser all assets necessary to conduct Seller’s businesses as presently conducted. Attached to the Agreement was a schedule of equipment that included all tangible assets used by Seller in its business, including a 20-ton overhead crane and other heavy equipment affixed to the real estate, which equipment was defined in the Asset Purchase Agreement as the Personal Property.

The assets that Purchaser was not purchasing from Seller were defined as Excluded Assets and included the land and building at which Seller operated the business and any “building improvements.” Seller and Purchaser agreed that Seller would lease the real property to Purchaser contemporaneously with the sale of the Personal Property.

Three years after the closing, Purchaser began relocating the business to a different building. When Purchaser began moving equipment from the building, Seller objected on the grounds that the crane and other heavy equipment was affixed to the building and therefore was not sold by Seller to Purchaser. Purchaser responded that Seller had sold all of the equipment to Purchaser in 2014 pursuant to the terms of the APA. Seller filed a declaratory judgment action in the Leflore County Circuit Court asking the court to determine that the equipment at issue was building improvements and fixtures that had been excluded from the property sold to Purchaser, alleging conversion and breach of the lease, and seeking compensatory damages, punitive damages and attorneys’ fees. Seller filed a motion for summary judgment. Purchaser filed a motion for summary judgment asserting that the APA made clear that the crane and other equipment affixed to the building were sold by Seller to Purchaser.

The Circuit Court granted the Seller’s motion for summary judgment. The Circuit Court relied on the common law of real property and fixtures to find that the crane and other affixed equipment were “certainly building improvements, if not in fact fixtures.” Since the Purchaser did not own the affixed equipment, the Circuit Court wrote, the Purchaser committed conversion when it removed the equipment from the building and awarded the seller damages.

On appeal, the Mississippi Supreme Court, in an en banc opinion by Chief Justice Randolph, reversed the Circuit Court on the issue of ownership of the affixed equipment. Justice Randolph wrote that the APA specifically characterized the disputed equipment as personal property that was being sold by the Seller to the Purchaser. Since the equipment was owned by the Purchaser, Purchaser did not commit conversion by removing the equipment from the building. As a separate rationale for finding that the Purchaser could remove the affixed equipment, Justice Randolph relied on the doctrine of trade fixtures, which provides that when a lessee installs personal property that becomes affixed to the leased real property, such personal property is considered “trade fixtures” that the lessee can remove at the end of the term.

The Supreme Court affirmed the trial court’s judgment that the Seller was entitled to some damages. Purchaser had breached its obligations under the lease to maintain and repair the leased premises by not repairing the damage to the building caused by the removal of the crane. The Supreme Court remanded the case for determination of the appropriate amount of damages for breach of the lease.

Note 1: The holding that the parties to a commercial contract can determine among themselves whether affixed equipment is real or personal property is not new. In most circumstances whether or not affixed personal property has become a part of the real estate is going to be a murky question based on intent, though a large overhead crane attached to the building seems like an extreme example. What is interesting to the editor is the practical problem presented when the purchaser seeks to separate the affixed personal property from the real estate. Unless the parties provide otherwise, the purchaser is going to be responsible for the cost of repairing the damage.

Note 2: The Supreme Court wrote that the treatment of the affixed equipment as real or personal property under the lease could not be used to prove whether the affixed equipment was part of the property sold under the APA, but then relied on the doctrine of trade fixtures, which the editor has always understood to be a leasing doctrine, to determine that the Purchaser had purchased the affixed equipment under the APA. Also, does the doctrine of trade fixtures fit when the lessee, like the Purchaser in this case, did not install the affixed equipment?

Note 3: It would be interesting to know whether the tax assessor assessed the affixed equipment as real or personal property. In the editor’s experience, that might depend on whether the crane was part of the original construction of the building (most likely, given its size), in which case the equipment probably would have been treated as real property for ad valorem tax purposes, or added to the building later, in which case the tax assessor probably would have treated the equipment as personal property.

Note 4: When one is purchasing affixed property that the parties are characterizing as personal property including goods that have become affixed to the real estate, would it be prudent to get a deed to the property in addition to a bill of sale to cover all bases? Or would getting a deed raise the question about the validity of the parties’ agreement that the affixed property is personal property?

Note 5: The Supreme Court’s finding that the Purchaser owned the crane eviscerated the Seller’s argument that the Purchaser committed conversion and was liable for compensatory damages for conversion. The Supreme Court then held that Purchaser was liable to the Seller for damages for breach of contract (the obligation to maintain and repair in the lease). Since the Purchaser owned the crane and other affixed equipment, the Purchaser did not breach the lease by removing the equipment. But damaging the building and not repairing the damage did breach the Purchaser’s obligations under the lease to maintain and repair the building. The difference between finding that the Purchaser breached the contract/lease and that the Purchaser committed a tort (conversion) is important because the measure of damages for breach of contract is different than the measure of damages for a tort. The measure of damages for conversion included the cost of replacing the affixed equipment. The measure of damages for breach of contract was the cost to repair the building, which the editor speculates is much less than the cost of replacing equipment removed by the Purchaser.