Opinion
No. 7,317.
Submitted November 9, 1934.
Decided November 20, 1934.
Mortgages — Leasehold Interests — Manner of Execution and Recording — Trade Fixtures — When Treated as Interests in Real Estate — Lien of State for Unpaid Gasoline Taxes — When Inferior to Mortgage. Mortgages — On Leasehold Interest — Execution and Recording as Real Estate Mortgage. 1. A mortgage on a leasehold interest in land running for a term exceeding one year must be executed and recorded as a real estate mortgage. Same — On Gasoline Stations, Erected on Leased Lands, and Fixtures — Properly Treated on Foreclosure as Real Estate. 2. Under a mortgage covering gasoline service stations erected on lands leased for a term of years, as well as the pumps, air compressors and other appliances affixed to or sunk into the ground, recorded in compliance with statutory provisions relating to real estate mortgages, the trial court properly found in an action to foreclose the mortgage, that the leasehold interest as well as the various fixtures were real estate, and that the lien of the mortgage having attached before that of the state, intervener, for unpaid gasoline license taxes, the mortgage was superior thereto. Leaseholds — Lease Permitting Removal of Trade Fixtures at Expiration of Term — Mortgage of Leasehold With Fixtures — Effect as to Fixtures. 3. Where a contract of lease contains a clause permitting the lessee to remove trade fixtures attached to the soil after expiration of the lease (as did the lease referred to in paragraph 2 above), the agreement as between the parties thereto manifests an intention that the things so attached shall remain personal property; but where the lessee mortgages his leasehold interest with the fixtures thereon, the mortgage covers the fixtures, which might otherwise have been removed, as well as an interest in real estate.
Appeal from District Court, Silver Bow County; T.E. Downey, Judge.
Mr. Raymond T. Nagle, Attorney General, and Mr. C.F. Morris, Assistant Attorney General, for the State, Intervener and Appellant, submitted a brief; Mr. Morris argued the cause orally.
Mr. Paris Martin, of the Bar of the State of Idaho, and Mr. J.A. Poore, for Respondent, submitted a brief; Mr. Poore argued the cause orally.
The trial court erred in holding that leases for years are real property and not personal property. At common law no estate or interest in land less than a fee or for life was real property. Any less estate in land was personal property. This is the universal rule in all states and too well established to require citation of authorities. That leaves the question to be determined: Do the statutes of Montana change the common-law rule and make a lease for years real property? Wheeler v. McIntyre, 55 Mont. 295, 175 P. 892, is the only case in this state that deals with this question, and there the court referred to plaintiff's lease as a "chattel interest. It is a chattel real as distinguished from a chattel personal. Section 4481 [6723 of Rev. Codes 1921] of the Revised Codes [1907] declares estates for years to be estates in real property, and Section 4485 [now 6727] defines chattels real to be estates for years; and it may be noted in passing that these sections work no change in the common law." If they work no change in the common law then obviously a lease for years is personal property.
The courts of California (from which state the above and other sections relating to real property were adopted) have repeatedly and uniformly held that all estates in lands less than a fee or and estate for life, are personal property. (See Jeffers v. Easton, Eldridge Co., 113 Cal. 345, 45 P. 680; Summerville v. Stockton Milling Co., 142 Cal. 529, 76 P. 243; Guy v. Brennan, 60 Cal.App. 452, 213 P. 265; see, also, Duff v. Keaton, 33 Okla. 92, 124 P. 291, 42 L.R.A. (n.s.) 472; State Trust Co. v. Casino Co., 19 App. Div. 344, 46 N.Y. Supp. 492; Rodack v. New Moon Theatre, 121 Misc. 63, 200 N.Y. Supp. 237; Myers v. Arthur, 135 Wn. 583, 238 P. 899; Kline v. Indiana Trust Co., 79 Ind. App. 466, 137 N.E. 555; Midyette v. Lycoming Timber L. Co., 185 N.C. 423, 117 S.E. 386; Elkton Elec. Co. v. Perkins, 145 Md. 224, 125 A. 851; Nelson v. Radcliffe, 110 Neb. 54, 192 N.W. 958.)
What rights has a lessee to remove trade fixtures placed upon land at the expiration of his lease? "Trade fixtures" are articles erected or annexed to the realty by the tenant for the purpose of carrying on a trade" ( Field v. Morris, 95 Ark. 268, 129 S.W. 543), and are removable by him during his term, provided the removal does not affect the essential characteristics of the article removed or reduce it to a mass of crude materials. ( Cohen v. Wittemann, 100 App. Div. 338, 91 N Y Supp. 493; Weeks-Betts Hardware Co. v. Roosevelt Lead Zinc Co., 153 Mo. App. 387, 134 S.W. 35.)
The purpose of the annexation and whether the fixture attached may be used for other purposes are important in determining the intention of the parties. ( Breyfogle v. Tighe, 58 Cal.App. 301, 208 P. 1008; Miller v. Struven, 63 Cal.App. 128, 218 P. 287; Boise-Payette L. Co. v. McCornick, 32 Idaho, 462, 186 P. 252; Mayer v. Waters, 45 Kan. 78, 25 P. 212; Lavenson v. Standard Soap Co., 80 Cal. 245, 22 P. 184, 13 Am. St. Rep. 147; Neufelder v. Third St. S. Ry., 23 Mont. 470, 63 P. 197, 83 Am. St. Rep. 831, 53 L.R.A. 600; O.L. Shafter Est. Co. v. Alvord, 2 Cal.App. 602, 84 P. 279.) The case of Stock Yards Pet. Co. v. Bedell, 128 Kan. 549, 278 P. 739, is on all-fours with the case at bar and we think determinative of the question involved here.
The intention of the parties determines the matter as to whether fixtures attached to the realty shall remain the property of the lessee who attaches them. ( Gosliner v. Briones, 187 Cal. 557, 204 P. 19; Placer County v. Lake Tahoe R. T. Co., 58 Cal.App. 764, 209 P. 900; Hammond L. Co. v. Gordon, 84 Cal.App. 701, 258 P. 612; Beebe v. Pioneer Bank T. Co., 34 Idaho, 385, 201 P. 717; L. M. Mer. Co. v. Wimer, 94 Kan. 573, 146 P. 1162; Reno Elec. Works v. Ward, 51 Nev. 291, 274 P. 196, 62 A.L.R. 247; Lawton Pressed Brick T. Co. v. Ross-Kellar T.P.B.M. Co., 33 Okla. 59, 124 P. 43, 49 L.R.A. (n.s.) 395; First State Sav. Bank v. Oliver, 101 Or. 42, 198 P. 920; Workman v. Henrie, 71 Utah, 400, 266 P. 1033, 58 A.L.R. 1346; Reeder v. Smith, 118 Wn. 505, 203 P. 951; Eaves v. Estes, 10 Kan. 314, 15 Am. Rep. 345.)
The intention of the parties in the instant case is clearly shown by the testimony of Mr. Claxton, which establishes the fact that all the leases granted the lessee was the right to remove all fixtures within thirty days after the termination of the lease.
The respondent contends that under the statutes of Montana, a lease of land for years is treated as real property for all purposes of this case. When we analyze the statutory provisions, we find that real property includes not only the ownership of, but the possession of, claim to, or right to the possession of land, with the improvements (sec. 1996, Rev. Codes 1921), and that personal property includes everything which is the subject of ownership not included within this definition of real property (sec. 1996). Also that real property is defined as immovable property, and personal property as movable (sec. 6666). No one would contend, we assume, that a lease for twenty-five years upon a city lot would be movable property, and neither would a tenancy at will of the same lot, or a lease for a year or more; it would constitute a chattel real (sec. 6727), and chattels real are treated as "estates in real property" within our Code provisions, because they constitute an estate in land (sec. 6723). In Boucher v. St. George, 88 Mont. 162, 167, 293 P. 315, this court, referring to section 6723, recognized that under our statutes all estates in real property are classified with respect to the duration of their enjoyment, and are either, estates of inheritance, estates for life, estates for years, or estates at will. Our statute (sec. 9262) provides how real property may be attached, and also how personal property may be attached. In Williard v. Federal Surety Co., 91 Mont. 465, 8 P.2d 633, this court held that within the purview of the above section, an oil and gas lease in this state is real property, and should be attached as such.
This court in Wheeler v. McIntyre, 55 Mont. 295, 175 P. 892, says, purely by way of dictum, "And it may be noted in passing that certain enumerated sections work no change in the common law; for in Co. Litt. Secs. 177, 118b, it is said that chattels real are `reall, because they concerne the realty, as termes for yeares of lands or tenements.'" The fact is, those sections do in many respects change the common law, and so far as this case is concerned they change the common law by declaring all estates in land, whether estates of inheritance or less than inheritance, to be real property; and classify real property as immovable property and personal property as movable. (See Hyatt v. Vincennes Nat. Bank, 113 U.S. 408, 5 Sup. Ct. 573, 28 L.Ed. 1009; San Pedro, L.A. S.L.R. Co. v. City of Los Angeles, (Cal.) 179 P. 390.)
In Rider v. Cooney, 94 Mont. 295, 23 P.2d 261, this court held that a lease of state lands for a term of years is an interest in land. It said: "When a lease is granted upon the public lands of the state for a term of years, an interest or estate in the lands has been alienated, and therefore the leasing of the lands of the state for a term of years is the disposal of an interest or estate in the lands within the provisions of our Constitution."
It is now contended by the appellant that all of the equipment upon the leased land is what is termed "trade fixtures," and therefore personal property. The leases were not produced, but counsel for the appellant called Mr. John K. Claxton as a witness, who testified over objection of counsel for respondent that he drew the leases, or some of them, and that "the right of removal of the fixtures within a reasonable time after the termination of each lease was incorporated in the instrument." The testimony of the witness does not describe the fixtures which might be removed, or what was to be considered fixtures for the purpose of removal, or the terms of removal, and is in fact valueless for any purpose.
As a general rule, the manner in which the attachment is made, the adaptability of the thing attached to the use to which the realty is applied, and the intention of the one making the attachment, determine whether the thing attached is realty or personalty, as between the parties. ( Montana Elec. Co. v. Northern Valley M. Co., 51 Mont. 266, 153 P. 1017; Padden v. Murgittroyd, 54 Mont. 1, 6, 165 P. 915.) But the article annexed is a fixture as regards persons not parties to the agreement. (26 C.J., p. 678, sec. 39.) By the weight of authority, a subsequent purchaser or mortgagee of the land without notice of the agreement is not affected thereby. (26 C.J., p. 681, sec. 47; Oakland Bank of Savings v. California Pressed Brick Co., 183 Cal. 295, 191 P. 524.)
Prior to 1931 the Idaho Community Oil Company, an Idaho corporation, was operating ten or twelve gasoline service stations in this state, certain of which were erected upon lands held under lease for a term of years.
In January, 1929, the corporation executed a mortgage to the Standard Oil Company of California to secure a note for $35,000, purporting to cover all of the service stations and including all of the property of the mortgagor, whether real or personal; this instrument was made a matter of record both as a real estate and chattel mortgage.
In 1931 one John Sampson was appointed receiver for the Idaho concern, and the Standard Oil Company commenced foreclosure proceedings against the mortgagor and receiver. The defendants joined issue, and the state of Montana was permitted to intervene and filed a complaint in intervention to recover amounts due it from the Idaho concern in gasoline license taxes for which it claimed a lien upon the property of the delinquent. The suit resulted in judgment and decree in favor of the plaintiff and the receiver, and the intervener appealed. On the appeal this court held that, because of the failure of the mortgagee to comply with certain of the requirements of the chattel mortgage law, the mortgage was superior to the lien of the state only as to the real property, and remanded the cause for a modification of the judgment. ( Standard Oil Co. v. Idaho Community Oil Co., 95 Mont. 412, 27 P.2d 173, 175.)
On return of the cause to the trial court, evidence was received as to the nature of the property described in the mortgage, and thereupon the court made exhaustive findings placing the various items under the headings of real and personal property and entered its amended decree in accordance therewith. The intervener has appealed from this judgment.
On the hearing had, evidence was adduced to the effect that the majority of the service stations stood on lands leased by the defendant company for a term of years and that the leases provided that the lessee might remove trade fixtures attached to the land at the expiration of the leases. The intervener contends that the court erred in classifying these leasehold interests, gasoline pumps, tanks, air compressors, and other appliances affixed to, or sunk into, the ground, as "real estate."
It is true that, at common law, a leasehold interest in land [1-3] was considered personal property, governed generally by the rules applicable to that class of property, and that this rule remains in force unless changed by statute. (35 C.J. 970; 15 Cal. Jur. 601.) California, from which we took much of our law relating to real property, has declared that the common law in this respect has not been changed ( Jeffers v. Easton etc. Co., 113 Cal. 345, 45 P. 680), and we have made a like declaration ( Wheeler v. McIntyre, 55 Mont. 295, 175 P. 892). But, if we concede that the law, to this extent, is settled in this jurisdiction, the concession does not answer the question presented on this and the former appeal in this action.
On the former appeal the question for determination was as to the validity of the mortgage by which the defendant corporation had, before any rights of the intervener had attached, sought to hypothecate all of its property, whether real or personal, as security for the payment of its debt to the plaintiff. The record failing to disclose that the property described was other than the usual real and personal property, the court declared that: "The omission of the proper affidavit rendered the mortgage invalid only so far as it covers personal property. The mortgage was properly recorded and should be upheld as to the real estate covered by it." ( Standard Oil Co. v. Idaho Community Oil Co., supra.) This declaration goes no further than to declare the mortgage valid as a real estate mortgage. Regardless of the wording of the former opinion, all property which, under the laws of this state, is properly included in a real estate mortgage, is "covered" by the instant mortgage, whether technically classified as "real estate" or personal property.
The text in Corpus Juris, cited above, continues: "Since a term for years conveys an interest in the land, it has sometimes been considered for particular purposes as real estate." Among the purposes mentioned in the footnote is "mortgage, see Mortgages (27 Cyc. 1040)." The statement in "Cyc." is: "A mere term of years or leasehold interest in land is also mortgageable as realty." When, however, the subject of mortgages was treated in Corpus Juris, this statement was abandoned; the parallel text being: "Under a statute providing that the term `real estate' shall include chattels real, a chattel real is the proper subject of a real estate mortgage." (41 C.J. 372.)
In spite of the broad statement by the California court, quoted above, that court has held that a leasehold interest is real estate within the taxation statute which declares that "the term `real estate' includes `the possession of, claim to, ownership of, or right to the possession of land'" ( San Pedro, L.A. S.L.R. Co. v. Los Angeles, (Cal. Sup.) 179 P. 390, 391 [not reported in State report]), and with reference to the identical statute, this court has said, "This would be the rule independently of statute." ( Northern P. R. Co. v. Mjelde, 48 Mont. 287, 137 P. 386, 388.)
What, then, is the nature of a leasehold interest under lease for a term of years for the purpose here considered, and, if it may be mortgaged, how must it be mortgaged?
Our Code provisions warrant the following summary: A lease for a term exceeding one year must be in writing (sec. 7519, Rev. Codes 1921), and the written lease is a conveyance (secs. 6764, 6765), creating an interest in real property (sec. 6936) and an "estate" in real property (sec. 6723) which may be transferred (sec. 6859), and, therefore, may be mortgaged (sec. 8262). When "any interest in real property" is mortgaged (sec. 8262), the mortgage shall be substantially as outlined in section 8263, and "may be acknowledged or proved, certified, and recorded in like manner and with like effect as grants thereof." (Sec. 8266.) The "grant" of such an "estate in real property" is governed by the provisions respecting the "transfer of real property." (Chap. 15, Part IV, Civil Code 1921 (sec. 6859 et seq.) While a chattel mortgage is merely "filed" in the office of the county clerk (sec. 8278), all instruments "affecting the title to or possession of real property" may be recorded (sec. 6890), provided they are duly acknowledged as required by law (sec. 6893), and such a mortgage must be recorded in order to protect the holder against subsequent purchasers or encumbrancers, in good faith, whose conveyance is first duly recorded (secs. 6934, 6935), for "the term `conveyance,' as used in the two preceding sections, embraces every instrument in writing by which any estate or interest in real property is created, aliened, mortgaged, or encumbered, * * * except wills." (Sec. 6936.) It is therefore manifest that a mortgage of a leasehold interest in land must be executed and recorded as a real estate mortgage, and, consequently, the mortgage in question constituted the prior lien an interest of the defendant company in the lands described in the mortgage.
There is some evidence in the record to the effect that the leases mentioned contained a clause permitting the lessee to remove trade fixtures attached to the soil, within thirty days after the expiration of the leases. As between the landlord and tenant, this agreement manifests an intention that the property so attached shall remain personal property. ( Butte Elec. R. Co. v. Brett, 80 Mont. 12, 257 P. 478; Padden v. Murgittroyd, 54 Mont. 1, 165 P. 913; Mattison v. Connerly, 46 Mont. 103, 126 P. 851.) But this provision is for the protection of the tenant, and where, as here, the tenant mortgages his leasehold interest in the lands described, with the improvements and fixtures thereon and thereto attached, the mortgage covers articles attached to the freehold which the tenant had a right to remove as against his landlord. (26 C.J. 721; Knapp v. Jones, 143 Ill. 375, 32 N.E. 382; Commercial Bank v. Pritchard, 126 Cal. 600, 59 P. 130; McLeod v. Barnum, 131 Cal. 605, 63 P. 924.) The situation of the parties is no different than it would have been had the tenant assigned its leases and sold the property attached to the soil to the assignee.
For the reasons stated, the judgment is affirmed.
MR. CHIEF JUSTICE CALLAWAY and ASSOCIATE JUSTICES ANGSTMAN, STEWART and ANDERSON concur.