Fixture Security Agreements
Fixtures are goods that have become so related to particular real property that an interest in them arises under real property law. Com C §9102(a)(41). Civil Code §660 specifies when a thing is deemed to be affixed to land and is thus a real estate fixture. Whether a particular item constitutes a fixture is not always clear and turns in part on the intentions of the parties. See, e.g., Crocker Nat’l Bank v City & County of San Francisco (1989) 49 C3d 881, 885.
When personal property is affixed to the land, it becomes part of the real property under the doctrine of fixtures. CC §§658, 660. As such, it is subject to any subsequently executed real property mortgage or deed of trust and also is subject to previously executed mortgages or deeds of trust under the doctrine of after-acquired title. CC §2930; Commercial Bank v Pritchard (1899) 126 C 600; Hill v Gwin (1875) 51 C 47. Thus, a typical residential mortgage covers not only the land but also the house and its built-in appliances.
A real property mortgage or deed of trust in and of itself does not encumber personal property that is not affixed to the land. McLeod v Barnum (1901) 131 C 605. A beneficiary who seizes or sells such personal property may be liable for conversion. Strutt v Ontario Sav. & Loan Ass’n (1972) 28 CA3d 866. A creditor who wants a security interest in personal property as well as real property should execute a security agreement and file that agreement in accordance with the Commercial Code. Com C §§9201, 9203; Freedland v Greco (1955) 45 C2d 462; Oxford St. Props. v Rehabilitation Assocs. (2012) 206 CA4th 296. On issues that arise when the collateral consists of both real and personal property (“mixed collateral”),
A lease of equipment or personal property may create a security interest under certain circumstances, dependent on the facts of each case. See Com C §1203.
A security interest in fixtures (other than ordinary building materials incorporated into an improvement on land) can be created under Commercial Code Division 9. Com C §§9109(a)(1), (d)(11)(B), 9334(a). A security interest in fixtures can also be created under real property law, such as by a deed of trust encumbering the real property to which they are affixed. See Com C §9334(b).
Different sets of rules govern priority disputes between competing security (and other) interests in fixtures, depending on the law under which the interests arose:
- Priority between competing interests all created under real property law are simply governed by the priority rules of real property law.
- Priority between competing security interests all created under Commercial Code Division 9 are governed by the normal Division 9 priority rules for personal property security interests.
- Priority between competing interests, some of which were created under real property law and some of which are security interests created under Division 9, are governed by a special set of Division 9 priority rules, Com C §9334(c)–(g).
Commercial Code §9334(c) establishes a general rule that a Division 9 security interest in fixtures is subordinate to a conflicting interest of an encumbrancer or owner of the real property other than the debtor. Commercial Code §9334(d)–(h) then specifies the following exceptions to this general rule, under which the Division 9 security interest will have priority over the real estate claimant:
- The Division 9 security interest is a purchase money security interest, the interest of the real property claimant arose before the goods became fixtures, the security interest was perfected by a fixture filing (see Note below) before the goods become fixtures or within 20 days thereafter, and the debtor has an interest of record in or is in possession of the real property. Com C §9334(d). However, this priority normally does not apply if the competing real property law interest is a prior recorded construction mortgage. Com C §9334(h).
- The debtor has an interest of record in the real property or is in possession of the real property, and both of the following conditions are satisfied: (1) The Division 9 security interest is perfected by a fixture filing before the interest of the real estate claimant is recorded, and (2) the Division 9 security interest has priority over any conflicting interest of a predecessor in title of the real property claimant. Com C §9334(e)(1).
- The goods are readily removable factory or office machines or readily removable replacements of domestic appliances that are consumer goods. Com C §9334(e)(2).
- The conflicting interest is a judicial lien on the real property obtained after the Division 9 security interest in fixtures was perfected by any means (i.e., a fixture filing is not required). Com C §9334(e)(3).
- The Division 9 security interest is in a manufactured home, in certain circumstances. Com C §9334(e)(4).
- The holder of the real property interest consented to the Division 9 security interest in the fixtures or disclaimed an interest in the goods as fixtures, or the debtor has a right to remove the goods as against the real property encumbrancer or owner. Com C §9334(f). Regarding a tenant’s right to remove certain types of affixed property under real property law, see CC §1019, which is an exception to the general rule in CC §1013, which states that property affixed to land becomes the property of the landowner.
NOTE: A fixture filing—which is required by several (but not all) of the foregoing rules as a condition of priority—is a Commercial Code Division 9 financing statement that includes additional required information. Com C §§9102(a)(40), 9502(a)–(b). It is normally filed in the county recorder’s office where the related real estate is located. See Com C §9501(a)(1)(B).