Personal property — or chattels — is any “movable” asset that is not attached to a piece of land. Examples include furniture, vehicles, livestock, clothing, jewelry, and household goods. A transfer in real property ownership does not include the transfer of personal property on that real property.
Determining Real vs. Personal Property
The following methodology can be used to determine whether an asset is personal or real property.
Method of attachment: Is the asset in question a permanent fixture of the property, and/or was it attached (i.e. bolted, screwed, affixed, glued)? If it is, the property is considered personal property.
Intent: What was the intent of the property owner when he or she purchased the asset in question and brought it to his or her property? If it can be proven that the intent was to make the asset a permanent fixture of the property, it is considered real property.
Adaptability: If an asset is purchased and adapted specifically to the property, it is likely now considered real property. For example, flooring that is cut and shaped to the size and dimensions of a living room is considered real property, even if that flooring can be removed.
Relationship: In the event of a dispute between the buyer and seller, the relationship of the parties is used in determining whether the property transfers with the sale. Typically, courts will favor tenants and buyers in landlord-tenant disputes and seller-buyer disputes.
Written Agreement: A written agreement supersedes any standard interpretation of real vs. personal property law and, therefore, determines who is entitled to a specific asset. For example, if a seller of a property wishes to keep a specific item that would otherwise be considered real property in the sale, he or she could include this in the sales contract.
Examples of Real Property
Fixtures & Appurtenances
A fixture is a physical asset that was once considered personal property, but has since become real property. Personal property converts to real property when it is permanently, immovably attached to other real property.
The conversion from personal to real property is called annexation. Annexation occurs through installing, fastening, or drilling the item into the property.
For example, when a homeowner buys a bathtub at a store, it starts off as personal property. However, the bathtub becomes real property after it is installed in a property’s bathroom and connected to the water piping system.
Other examples include: ceiling lights, doors, blinds, or windows.
A fixture becomes an appurtenance. An appurtenance refers to assets that belong to, and go with, a real property in the event that ownership of that real property is transferred. Other examples of appurtenances include: swimming pools, garages, septic systems, or water tanks.
Case Review: Larkin v. Cowert (1968)
In the case, Larkin v. Cowert (1968) 263 Cal.2d 27., a debtor of real property brought legal action against the creditor who foreclosed on the debtor’s property.
Real property debtor (Larkin) built two apartment buildings. He purchased and furnished the apartments with drapes and carpets to increase the value and rental income. When a creditor (Cowert) foreclosed on the property for Larkin’s failure to make payments, he also took possession of the carpets and drapes. Larkin brought action against Cowert to collect for the value of the carpets and drapes ($11,322).
The Superior Court denied Larkin’s request for damages. It ruled that because the carpets and drapes had been “installed” on the property, they were now considered part of the building’s real property. The lower court’s ruling was affirmed by the appellate court.
Case Review: Allstate Ins. Co. v. County of Los Angeles and Security Pac. Nat’l Bank v. County of Los Angeles (1984)
In the case, Allstate Ins. Co. v. County of Los Angeles and Security Pac. Nat’l Bank v. County of Los Angeles (1984) 161 Cal.3d 877, two companies sued the county over the wrongful taxation of real property.
An insurance company (Allstate) and a bank (Pacific National Bank) owned computer systems. These systems included advanced computer equipment installed on a raised floor resting on jacks held with various adhesives. The equipment was not bolted or permanently installed in any manner. To prevent their operating systems from overheating, Allstate and Pacific National Bank installed additional air conditioning units. The systems were connected by cables and could be relocated upon the company’s request.
The Los Angeles municipal county imposed real property taxes on both companies for their computer systems. Allstate and Pacific National Bank sued, arguing that their computers were personal property. They sought refunds on the personal property taxes the state had required them to pay.
The Superior Court ruled in favor of Allstate and Pacific National Bank. It argued that the off-the-shelf, general use computers could be moved and thus, they would be considered personal, not real property. It reasoned that the plaintiffs were entitled to a tax refund. The Court of Appeals affirmed the ruling.
Case Review: Seatrain Terminal of California, Inc. v. County of Alameda (1978)
In the case, Seatrain Terminal of California, Inc. v. County of Alameda (1978) 83 Cal.3d 69., a marine facility owner
A property owner (County of Alameda) sold a marina facility to Seatrain Terminal of California. After buying the facility, Seatrain discovered that it was responsible for taxes levied on two cranes attached to the property. The cranes in dispute weighed 750 tons and constituted a functioning component of the property. Seatrain sued the County of Alameda, claiming that it was the County that was liable to pay the taxes on the cranes.
The Superior Court ruled in favor of the County. It concluded that because the cranes were a significant functioning component of the property and permanently attached, they were considered a fixture. As a fixture is part of real property and Seatrain was now the owner of that property, the court ordered Seatrain to pay the taxes.
Chattels real refers to personal property interests that concern real property. Examples include mortgages, trust deeds, livestock and leaseholds. Much like real property, the owner of chattels real can borrow against the asset and retain a loan. This is called a chattel mortgage.
Emblements — also known as fructus industriales — are crops cultivated through labor. Emblements are considered personal property, though they may transfer with the sale of a property.
Tenants who grow crops on land are entitled to a portion, or all of the emblements. The law of emblements ensures that tenants have the right to use, consume, sale, transfer, or otherwise do as they please with the “fruits of their labor”. A tenant and/or a tenant’s family are still entitled to emblements in the event that a tenant’s lease expires prior to the harvest of the crops; an estate is terminated; or the cultivator dies, resulting in forfeiture of the property.
Mineral, Oil, and Gas Rights
Mineral, oil, gas, and other naturally-occurring chemical rights are the property of the owner of the real property containing the raw material. Whether these rights are personal or real property is determined by the nature of the property’s ownership and whether there is a lease on the land.
A property owner is entitled to extract oil from his or her property, and to sell his or her mineral, oil, or gas rights. However, ownership cannot be claimed over non-extracted oil; it only applies after oil is removed from the ground. Once removed, oil is considered personal property.
However, this changes if the property is being leased.
If a tenant leases a property for oil drilling for an undefined period of time, the oil findings are considered the real property of the property owner. If, however, the tenant leases a property on a short-term basis with a definitive beginning and end date, the oil findings are the tenant’s personal property.
In the event that a lessee extracts minerals from a lessor’s property, he or she may pay a royalty fee to the property owner based on the extracted value of the oil and its ensuing sales.
Case Review: Geothermal Kinetics Inc. v. Union Oil Co. (1977)
In the case, Geothermal Kinetics Inc. v. Union Oil Co. (1977) 77 Cal.3d 56., a mineral owner (Geothermal Kinetrics) had a lease on a portion of land owned by Union Oil. Geothermal Kinetrics brought action to quiet title on the geothermal steam and geothermal resources under the property.
The Superior Court ruled in favor of Geothermal Kinetrics. Union Oil appealed, but the Court of Appeals upheld the lower court’s ruling. It ruled that the absence of showing specific intent, the intent of the parties of the lease created a geothermal interest for Geothermal Kinetrics.
A trade fixture is an item used by a lessee on a landlord’s property for the purpose of a trade or business. The trade fixture is the personal property of the tenant, and can be moved or removed at his or her discretion as long as the removal does not damage the property. (In the case that the equipment does definitively damage the property, the tenant is responsible for repairing the damage.)
The term trade fixture is often confused with fixture. Although both start out as personal property, a fixture becomes real property, whereas a trade fixture remains personal property.
Generally, trade fixtures are items relating to the production of a manufacturing, trade, or agricultural business. Examples of trade fixtures include: counters, shelves, attached furniture, machinery, signs, telephone lines, and others. As a vital component of a tenant’s business, trade fixtures cannot be removed from the property without cause.
Civil Code Section 1019 does restrict a tenant’s right to trade fixtures, however, when such fixtures becomes an essential component of the property.
Unless otherwise agreed to by the landlord and tenant, a trade fixture must be removed by the expiration date of the lease. In the event that the tenant does not remove the trade fixture, the property owner has the right to possess it. For example, a landlord may repossess a trade fixture if a tenant’s business goes bankrupt and he or she doesn’t have the money to remove the trade fixture from the landlord’s property.
However, courts have determined that a tenant must be allowed a reasonable period of time to complete the removal, particularly as some removals require third party servicers. Typically, courts will side with tenants unless the removal of a trade fixture negatively affects the subject property.
The case, Yokohama Specie Bank Ltd. v. Hagashi (1943) 56 Cal.2d 709., involved a tenant who installed a refrigeration plant into the building they leased.
The tenant (Hagashi) installed a $10,000 refrigeration plant that required the removal of certain column and structural components. The refrigerator also had attachments into the building that could not be removed without damage, or safety concerns. When Hagashi moved, he wished to take his refrigeration system with him. Yokohama Specie Bank, Ltd. sued.
The Superior Court ruled that the refrigerator’s permanent fixture attachment — and the fact that it would cause damage upon its removal — made it part of the building’s real property. Hagashi was prevented from taking it with him.