(Ontario Real Estate Source)
By Brian Madigan LL.B.
There are of course liens, charges and encumbrances that can be registered against chattels. That happens all the time with motor vehicles. Cars are sold and they are subject to a chattel mortgage.
Now, the next question is the attachment of a big ticket item to the real estate. Sometimes, the big ticket item overwhelms the actual land and building. Consider the case of a $2 million MRI placed in a medical clinic. The waiting room and a few interior partitions for some offices and changing rooms and all the leasehold improvements can be had for $50,000.
So, what happens to the MRI? It ends up being built into the building. Installation will cost a few hundred thousand dollars. Does it just become part of the realty? Does the landlord own the MRI at the end of the lease term? This is much different than a few sheets of drywall partitioning and a tile floor.
There is an Act that deals with this. It is the Personal Property Security Act (PPSA). It essentially deals with the registration of liens or chattel mortgages on personal property.
Here are the rules when a large or significant chattel is affixed to the realty:
Fixtures
34. (1) A security interest in goods that attached,
(a) before the goods became a fixture, has priority as to the fixture over the claim of any person who has an interest in the real property; or
(b) after the goods became a fixture, has priority as to the fixture over the claim of any person who subsequently acquired an interest in the real property, but not over any person who had a registered interest in the real property at the time the security interest in the goods attached and who has not consented in writing to the security interest or disclaimed an interest in the fixture.
Exceptions
(2) A security interest mentioned in subsection (1) is subordinate to the interest of,
(a) a subsequent purchaser for value of an interest in the real property; or
(b) a creditor with a prior encumbrance of record on the real property to the extent that the creditor makes subsequent advances,
if the subsequent purchase or subsequent advance under a prior encumbrance of record is made or contracted for without knowledge of the security interest and before notice of it is registered in accordance with section 54.
Removal of collateral
(3) If a secured party has an interest in a fixture that has priority over the claim of a person having an interest in the real property, the secured party may, on default and subject to the provisions of this Act respecting default, remove the fixture from the real property if, unless otherwise agreed, the secured party reimburses any encumbrancer or owner of the real property who is not the debtor for the cost of repairing any physical injury but excluding diminution in the value of the real property caused by the absence of the fixture or by the necessity for replacement.
Security
(4) A person entitled to reimbursement under subsection (3) may refuse permission to remove the fixture until the secured party has given adequate security for the reimbursement.
Retention of collateral
(7) A person having an interest in real property that is subordinate to a security interest in a fixture may, before the fixture has been removed from the real property by the secured party in accordance with subsection (3), retain the fixture upon payment to the secured party of the amount owing in respect of the security interest having priority over the person's interest.
Application of the Rules
Those were the rules. Let's consider the following. ABC Financing Co. pays for the MRI and registers a lien under the PPSA as against XYZ Medical Clinic.
First National Mortgage Co. has a mortgage on the real property of Joe the Landlord.
Here is what happens:
1) The MRI arrives at the site as a chattel. ABC's lien has priority.
2) The MRI is installed and becomes a fixture.
3) First National's mortgage and Joe the Landlord have priority over the MRI.
4) However, ABC, still has priority if First National and Joe consent.
5) An arms-length purchaser for value without notice will have priority (real property law).
6) Further advances under the First National mortgage will have priority unless First National waived that right.
7) The two previous rules (5, and 6) do not apply if ABC Financing previously registered a lien under the PPSA.
Now, the next step is the removal of the MRI, if the clinic doesn't make the payments and the loan falls into default. The finance company can remove it, but has to reimburse Joe the Landlord (or First National) for any damage.
Since it cost several hundred thousand to install, its removal will be costly. It must be dismantled and the building restored.
Concerned about the potential damage, Joe the Landlord might require the sum of $50,000 to be posted to attend to the restoration costs prior to consent to the removal.
You will also notice that there is a right to keep it in place. So, assume that $1.5 million remains unpaid. The owner of the property the first mortgagee and any subsequent mortgagee who arrived afterwards all have the right to pay the $1.5 million outstanding and keep the MRI in place.
The rules under the Personal Property Security Act are designed to protect other parties who have a clear and measurable interest in chattels that become affixed to the real property.
So, while the law of fixtures under real property law is not altered, the question of priorities among parties is determined by statute. It is based upon fairness and normal commercial practice.
Obviously, a $2 million MRI doesn't arrive at a clinic without the knowledge of the landlord, nor without the registration under the PPSA. And, it would not be affixed to the realty without a waiver, consent, acknowledgment, contract, deferral or postponement agreement in place.
Lawyers for the parties will search title and the PPSA registrations as part of the transaction, so there should be "no surprises".
Again, this is a significant element of the law when it comes to chattels and fixtures and has absolutely nothing to do with an agreement of purchase and sale.
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 905-796-8888
www.OntarioRealEstateSource.com
