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A crucial factor from the standpoint of the mortgagee is the obtaining of a valid first lien on the improvements by their treatment and acceptance by the courts as a part of the real estate. In each case, the law of the jurisdiction governs, although in most cases the listing in the mortgage of the improvements as part of the real estate will suffice to determine their identity as a part of the real estate and thereby assure their inclusion as a part of the

mortgage security. Ordinarily, however, if the payment terms of the mortgage have been arranged so as to leave a substantial margin of security at all times, the package mortgagee may feel that he need look only to the real estate for his security.

In any such determination, it is first necessary to consider the law of fixtures. A chattel may or may not be a fixture, depending on various circumstances to be discussed. But only by having identity as a fixture may a chattel become real property and partake of the character, incidents, and properties of realty.1 If an item can be properly defined as a fixture, then its inclusion in a real estate mortgage is assured automatically, even without mention in the instrument.2 The problem, however, is to discover or predict correctly whether all or any of the items of equipment that distinguish

the package home are fixtures and, therefore, security appropriately included in and effectively covered by the lien of a real estate mortgage.

Three propositions have commonly been considered by the courts in making a determination of whether a chattel used in connection with realty will be considered a fixture: (1) The intention of the parties concerned to make the chattel a permanent annexation to the realty is conclusive. (2) Annexation of the chattel to the realty or something appurtenant thereto is good evidence of intention. (3) Adaptation or application of the chattel to the use or purpose of that part of the realty with which it is used or connected is good evidence of intention.

Intention-The annexor's intention that an item is to be considered a part of the realty is the most important factor in the determination of what is a fixture. This intention cannot be a silent or secret intent, but rather one that is demonstrated by the acts and circumstances surrounding the annexation. Although both annexation and adaptation figure in the determination of intention, i.e., the structure and mode of annexation and the purpose or use for which the annexation is made, the most important evidence of intention is a written agreement expressing the intention of the annexor.

1See 36 CJS, 889-891; Thompson, Real Property, Par. 160 (perm. ed.); Kratovil, Real Estate Law, Sec. 827 (1952 ed.).

*First National Bank v. Reichneder, 871 Pa. 463, 91 A (2d) 277 (1952).

The leading case is Teaff v. Hewitt, 1 Ohio St. 511, 59 Am. Dec. 634 (1853), 86 CJS 892; Tiffany, Real Property, Par. 607 (3rd ed.); Thompson, Real Property, Par. 162 (perm. ed.). See Fry v. Lost Key Mines, 239 P (2d) (Cal. 1952); In re Slum Clearance in City of Detroit, 332 Mich. 485, 52 NW (2d) 195 (1952).

"The tendency found in the modern decisions is to stress the third test-that of intention-making it controlling where there is doubt as to the effect of the other two"-Dunn v. Assets Realization Co., 16 P (2d) 870, 371 (Ore. 1932); also Mullins v. Sturgill, 192 Va. 653, 66 SE (2d) 483 (1951). "The intent of the party making the annexation of a chattel to realty is the cardinal inquiry in determining whether a chattel so annexed... is a part of the realty." Becwar v. Bear, 41 Wash. (2d) 87, 246 P (2d) 1110 (1952). "Of these tests the most important is intention," Rudolph Wurlitzer Co. v. Cohen, 144 A 641, 644 (Md. 1929). "The established rule in this and most jurisdictions is that.. the primary test is the intention of the parties at the time of the transaction and installation, and that proof of adaptability and necessity merely bears on the question of intention," Guardian Life Insurance Co. of America v. Swanson, 3 NE (2d) 324, 326 (Ill. 1936); 36 CJS 894, 895; 22 Am. Jur. 718; Thompson, Real Property, Par. 163 (perm. ed.); Tiffany, Real Property, 606, 607 (3rd ed.); in Cumberland Power and Light Co. v. Hotel Ambassador (Me. 1936), supra, the court said, "If the owner's intention to make chattel part of the realty is duly manifested, the article is dedicated to the realty, and its status as personalty has ceased." See also Strain v. Green, 25 Wash. (2d) 692, 172 P (2d) 216 (1946), where it was held that the intention test was an objective one and was to be determined from the nature of the article, relation of the parties, adaptation, mode of annexation and all the surrounding circumstances.

...

Indeed, the Supreme Court of Maine said, "A special agreement may conclusively determine the question [of intention]."5

Annexation-To take on the characteristics and properties of realty, a chattel must be "annexed" to the real estate or something appurtenant thereto. Annexation may be (1) the physical incorporation of the item into the structure, the screwing or bolting down, or (2) "constructive" annexation such as a connection by wire or pipe with the realty, or, as in the case of a rail fence, solely by force of gravity.7

Adaptation-Outweighing annexation as a factor in determining whether an item qualifies as a fixture, adaptation to the use or purpose to which the realty is devoted is largely, in the last analysis, a matter of opinion. The tenor of the relatively few decisions on this point indicates that there must be a peculiar adaptation. For instance, built-in home equipment not only meets the test of annexation, but is conclusive evidence of its peculiar adaptation to the use and purpose of the realty. It clearly is specially planned for that particular home. Movable items, however, such as washing machines on casters, vacuum cleaners and similar items, many times fail to meet this test. Some other questions arise where items such as refrigerators and stoves are not

"built-in."8 Some courts hold that since they are usually stock items for general trade, they are not specially designed for the building, and hence in the absence of a special agreement do not fully meet the test of adaptation. Adaptation is closely interrelated with the intention of the parties.

It will be seen that the tests of annexation and adaptation are not really separate and distinct at all, but rather are components of the overall test of intention. The intention test is comprehensive and all-embracing.

JUST

UST AS INTENTION is the paramount and controlling factor in ascertaining whether a given item is a fixture, an express agreement of the annexor is the principal evidence of intention.10 Thus it is that in deciding the crucial question of intention the full importance of the package mortgage comes into play. By specific enumeration of affixed household equipment as part of the realty to which the coverage of the lien extends, the package mortgage unmistakably supplies the major evidence of intention, which intention is the paramount and controlling test of whether such articles are fixtures. For built-in home equipment the package mortgage furnishes conclusive evidence of intention in addition to that inferable from the actual annexation and adaptation of such items. For other equip

Hayford v. Wentworth, 54 A 940 (Me. 1903).

"In Holt v. Henley, 232 U.S. 637 (1914), the court commented that in view of the great changes modern appliances have made in the American way of life, courts should not continue to attach "mystic importance to attachment by bolts and screws.'

"

"Leisle v. Welfare Building and Loan Assn., 232 Wis. 440, 287 NW 739 (rollaway bed, 1989); Glueck & Co. v. Powell, 61 SW (2d) 406 (Mo. 1933) (refrigerator connected by electric cord); General Heat & Appliance Corp. v. Goodwin, 54 NE (2d) 676 (Mass. 1944) (heating unit connected to fuel pipe and air ducts); Fuson v. Whitaker, 190 SW (2d) 305 (Tenn. 1945) (wall cases); Schmuch v. Beck, 234 P 447 (Mont. 1925) (pole fence); Byran v. Lawrence, 50 N.C. 337 (1858) (loose floor planks); In Cumberland Power & Light Co. v. Hotel Ambassador, 183 A 132 (Me. 1936), the court said, "It is not necessary that the chattel be physically annexed to the realty at all times. The annexation may be constructive or actual." See Note, 109 ALR 1424.

Madjes v. Beverly Development Corp., 251 N.Y. 12, 166 NE 787.

"Indeed," says Kratovil, writing in 97 U. of Pa. Law Rev. 180, "adaptation and mode of annexation are now frequently regarded as not separate tests at all, but as circumstances throwing light on the question of intention."

10See discussion in Thuma v. Granada Hotel Corp., 269 Ill. App. 484 (1933) (package mortgage and purchase money chattel mortgage). For agreement overriding a statute, see Garnett v. Mankel, 163 P (2d) 466 (Cal. 1945). Also 7 ALR 1578.

ment such as ranges and refrigerators, the owner's intention that such items are attached as fixtures and are to be treated as realty is clearly expressed in the written terms of the mortgage.11 It is our opinion that in practically all jurisdictions,12 most affixed chattels may, by express agreement between the mortgagor and the mortgagee, be made a part of the realty.13

Government agencies have indicated their approval of the advantages of the package mortgage. The VA will accept package loans for guaranty or insurance, provided a proper lien is secured on the various items under the applicable state law. The value of the utilities is included in the official VA appraisal, the only restriction in addition to the lien requirement being that the equipment be of the cost, quality and type called for by the class of home involved.14 The FHA will include the value of items in the appraised value, provided it is reasonably convinced that the items are commonly treated as part of the real estate in the community and that the mortgage terms set them out specifically as such.15

LTHOUGH WE HAVE set out insofar

tures appears to be, another important factor to be considered is how the law is construed and applied by the courts

in a given case. In a controversy over whether an item is or is not a fixture, the relationship of the parties often affects the decision. In cases involving grantor and grantee, vendor and purchaser, mortgagor and mortgagee, the rules for determining what is a fixture are strongly construed by the courts against the first-named parties. Accordingly, courts are usually quite prone to find that chattels annexed to the realty are fixtures so that they will pass with the land. On the other hand, in other controversies where landlord and tenant, owner of fee and conditional sales vendor, owner of fee and life tenant are involved, the courts have consistently relaxed the law of fixtures to permit the tenant and the conditional vendor to remove whatever chattels they may have affixed to the realty.16 For the most part, however, such situations involve the relationship of mortgagor and mortgagee; it may be expected, therefore, that the courts will find few obstacles in holding the home equipment under consideration to be fixtures. The courts seem to try to arrive at intention which is controlling. The owner is presumed to intend to improve his property, especially if he expresses his intention to do so. The tenant is not presumed to intend to make his chattels a part of the landlord's property, even if he attaches them to the house in some way.

"The evidentiary value of agreements is, however, not without limitation. See excellent discourse in Madfes v. Beverly Development Corp., 166 NE 787, 251 N.Y. 12. Pure intention, as set forth in an agreement, is not alone sufficient to compel the courts to regard some items as realty; no matter how strong the intention, throw rugs, items of furniture can never be fixtures. The apparent intention, the legal intention, the intention indicated by the physical facts may override the expressed intent of the annexor. See also In re Allen St. and First Ave., 176 NE 377 (N.Y. 1931).

In New York, however, due to the courts' rigid application of the doctrine of "inherent chattels," most mortgagees, instead of attempting to characterize mortgaged articles as fixtures, seek to have the real estate mortgage operate also as a chattel mortgage. It has been held that one instrument mortgaging both chattels and real estate may be a valid chattel mortgage as to the personal property included. See General Snyod, etc. v. Bonac Realty Corp., 297 N.Y. 119, 75 NE (2d) 841 (1947). This is also permitted in California, Durst v. Battson, 9 Cal. (2d) 156, 69 P (2d) 992 (1937).

13See Brandt v. Koppelman, 169 Pa. Super. 236, 82 A (2d) 666 (1951); Hill v. Salmon, 236 P (2d) 518 (Wyo. 1951).

VA, TB 4A-95; also 38 USC, Secs. 694 and 694a; see also VA Solicitor's Opinion No. 127-53, July 14, 1953.

15 Letter to Architectural Forum from B.C. Bovard, General Counsel of FHA, July 11, 1944. See 12 USC, Sec. 1709.

16 Kelly v. Austin, 46 Ill. 146; Standard Oil Co. v. LaCrosse, etc., 217 Wis. 237, 258 NW 791; Notes, 41 ALR 601, 88 ALR 1114; Swift Lumber & Fuel Co. v. Elwanger, 127 Neb. 740, 256 NW 875.

Other Problems

Controversies most likely to arise concerning the package mortgage will be actions involving the mortgagee and any one of the following persons: (1) the mortgagor, (2) purchasers of the realty, (3) bona fide purchasers of the home equipment having no notice of the mortgage, (4) judgment creditors, (5) mortgagees holding subsequent chattel mortgages.

In the first instance, both parties would be estopped by the express terms of the mortgage contract from asserting that the articles in controversy were, in fact, chattels. In the case of sale of the mortgaged premises, the recordation of the mortgage is, of course, notice to the vendee that the items of equipment are real estate. Should he remove the fixtures, he would be liable to the mortgagee for damages. The situation where the mortgagor severs a fixture from the real estate, transports it elsewhere and sells it to a bona fide purchaser for value is more serious: the mortgagee has no recourse except against the mortgagor.17 The purchaser's title is good against the world, inasmuch as there is no actual or constructive notice of the mortgage where the item is to all appearances a chattel.18 If, however, it can be shown that the purchaser has actual notice of the mortgage, any title he acquires will be inferior to that of the mortgagee.

A subsequent chattel mortgage and

a sale of the fixtures while still annexed to the realty raises the question of whether the nature of the article and its attachment to the realty puts the chattel mortgagee or purchaser on notice that the articles may be realty and covered by the lien of a real mortgage. Courts hold that the annexation and adaptation serve to place such parties on inquiry as to whether such items are personalty or realty, and that since the articles are a part of the realty, the real mortgagee has superior rights.19 This reasoning applies also to the judgment creditor.

Package items acquired after the recording of the mortgage and the replacement of worn-out items also offer a problem.20 As between the mortgagor and the mortgagee, the package mortage extends the mortgagee's interest to these items. This may be done by express clause in the mortgage instrument, or it may be inferred from the fact that by the lumping of fixtures with the realty in the mortgage, similar fixtures and replacements are also to be considered as such. Subsequent purchasers or creditors also would take an interest secondary to that of the mortgage under the principles discussed earlier. The conditional sales vendor of such items, however, has sometimes been held to have a lien superior to that of the mortgagee, on the ground that the injury to the mortgagee's security is caused by the disposing of the old item, not by the vendor in selling the

17In some states, however (usually title theory states), the mortgagee is permitted to reclaim such articles even when he finds them in the possession of an innocent purchaser. See Note, 97 U. of Pa. Law Rev. 180, 210.

18In an effort to prevent such articles from passing into the hands of a bona fide purchaser, many mortgagees as a matter of routine affix a notice on the article itself, stating that it is covered by the real estate mortgage; purchasers of the marked articles would lose their protection if they saw the notice, for they could not qualify as bona fide purchasers.

19 Easton v. Ash, 18 Cal. (2d) 530, 116 P (2d) 433 (1941); First Mortgage Bond Co. v. London, 259 Mich. 688, 244 NW 203; Mortgage Bond Co. v. Stephens, 74 P (2d) 361 (Okla. 1937); Guardian Life Insurance Co. of America v. Swanson, 3 NE (2d) 324 (Ill. 1936); Leisle v. Welfare Building and Loan Assn., 287 NW 739 (Wis. 1939); Chicago Title & Trust Co. v. Waldman, 5 NE (2d) 737 (II. 1936).

See "The Package Mortgage and Optional Future Advances," 65 Harvard Law Rev. 478 at 482 (1952), for a discussion of this question; also Cohen and Gerber, "The After-Acquired Property Clause," 87 U. of Pa. Law Rev. 635 (1939).

new one.21 In cases where the conditional vendor is not permitted to remove his appliance, however, courts have held that he should be protected to the extent the mortgagee has been "unjustly enriched"-usually at the time of foreclosure.22 The law on this point appears to vary even in the same jurisdiction.

Conclusion

We see then that for the new homeowner, the package mortgage offers the advantage of low-cost, long-term financing of household equipment. For the mortgage lender, it offers an increased volume of business and eliminates defaults early in the life of a mortgage because of the borrower's

large cash outlays for home appliances. If the intent of the parties to include certain chattels as a part of the realty is carefully spelled out in the mortgage and if there is no attempt to extend the coverage of the mortgage to freely movable household furnishings or appliances, 23 the benefits accruing to both the mortgagor and the mortgagee will not ordinarily be denied by judicial authority. We advise the mortgagee to decide what may be made a part of the real estate and to take a real estate mortgage and rely upon it. It is obviously contradictory to say that certain articles are a part of the real estate and concurrently to say that they are chattels and take a chattel mortgage.

THE OPEN-END MORTGAGE

N OPEN-END MORTGAGE is a contract

rower providing that future borrowings after the original loan may be secured by the original mortgage. It means that once a homeowner has qualified for a mortgage on his property, he is enabled thereafter within varying limitations in the different jurisdictions to increase the amount of his mortgage to cover the cost of modernization or needed improvements, or for other purposes.

The open-end form offers advantages material to both parties. To the borrower, it allows modernization on a long-term credit basis, easy payments with no money down, and an economy in or elimination of refinancing costs. To the lender, it offers a large source of additional invest

ments and an opportunity to give additional service to the public; it tends to prevent an over-extension of credit on the part of the borrower, with consequent arrears and foreclosures. The economy and ease of additional financing often provide a strong incentive for the borrower to keep his loan with the original lender instead of going elsewhere, thus enabling the lender to retain seasoned loans with an enhanced value to the original security.

Lien Status of Additional Advances

There are three major kinds of future advances: (1) where the lender is, by the terms of the mortgage, obligated to make certain advances; (2) where the lender has the right to make certain advances to protect the

"Holt v. Henley, 232 U.S. 637.

Hurzthal v. Hurzthal, 45 W. Va. 584, 32 SE 237. "Since it is by no means certain that the real estate mortgage alone, even with elaborate fine-print clauses, will afford the mortgagee protection against the removal of readily removable articles, many mortgagees insist that the mortgagor in a package mortgage sign a separate chattel mortgage, which is filed in the chattel mortgage records of the county. Alternatively, the real estate mortgage may be filed in the chattel mortgage records as well as in the real estate records. Use of a separate chattel mortgage is preferable, because it contains a more specific description of the articles. The fine-print clauses of the real estate mortgage are, in many states, considered too vague and general to be valid as chattel mortgages." Kratovil, Real Estate Law, p. 212.

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