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Chattel & Fixture Assets

Real estate lawyers frequently encounter the question of whether something is a chattel or a fixture to a residential real property. The decision often clarifies which assets are included in a simple agreement of purchase and sale in a residential context and which are not. However, the nuances of the distinction itself are also extremely important in a commercial context when considering the implications for both lenders and borrowers in a secured lending transaction.

Definitions first: a fixture is an object or piece of personal property that has been “affixed” to real property with some degree of permanence. There is wealth of case law elucidating and developing this concept (e.g. Royal Bank v. Maple Ridge Farmers Market Ltd.), but a very rudimentary analytical tool is to consider whether the piece of personal property is unattached to the property except by its own weight. If the answer to that question is “yes”, you are dealing with a chattel, if it is “no” then the personal property will be considered a fixture. Fixtures, then, are pieces of personal property that become a part of the land.

There are a number of issues to be considered by lenders relative to the financing of equipment as personal property that will become fixtures to land. There are also concerns for those lenders lending against the real property, for a potentially competing situation can arise. The lender on equipment will argue that the personal property is collateral and that it does not form part of the land, whereas the lender on the real property will argue that the personal property is a fixture and improvement to the real property should be considered an extension of same.

The Personal Property Security Act (Ontario), section 34 exists for resolving such conflicts. According to its contents, if the security interest in the personal property attaches before it becomes a fixture to the real property, then that interest will carry the day. However, if the security interest attaches in the personal property after it becomes a fixture, the rights of the lender on the real property will dominate over and above those of the lender on the personal property. That said, the rights of the lender on the personal property still take priority over any subsequent secured parties. To ensure that this procedure functions correctly, a “notice of security interest” needs to be registered on title and with the correct Land Registry Office.

Agreements like inter-creditor agreements and priority agreements add another level of certainty to this regime, but this is a topic for another day!

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This article is provided for general information purposes and should not be considered a legal opinion. Clients are advised to obtain legal advice on their specific situations.

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