Unlocking An Ambiguity Of Home Improvement Financing: Classification Of Fixtures, Goods And Building Materials – Real Estate

Home improvement spendingis predicted to reach $485 billion in 2023.
When a consumer wants to improve upon their property, they often
seek financing for the project.

A finance company extending credit for home improvements may
elect to obtain a security interest in the items financed. Filing a
lien can perfect that interest and establish priority over other
lienholders. Where the financing is for a “fixture” upon
the consumer’s real estate, a Uniform Commercial Code (UCC)
fixture filing is permissible.

However, the question of whether an item financed constitutes a
fixture is a notoriously ambiguous, case-specific question and may
vary by state. Since any authoritative determination of status will
generally take place after a filing has been made, correct
classification at the time of filing is crucial.

To help finance companies navigate this issue, this article
discusses the three-prong test commonly used to determine if items
financed are, in fact, fixtures and offers practical
recommendations for perfecting security interests in fixtures.

The Three Factors Determining Whether an Item Becomes a
“Fixture”

According toU.C.C. § 9-102,fixtures are
“goods that have become so related to particular real property
that an interest in them arises under real property law.”For
example, water heaters, although separate goods at the time of
purchase, generally become fixtures after they are incorporated
into the home. However, other items financed are not so clear-cut,
and the determination of whether an item is a fixture involves both
UCC and real estate law.

The three factors that determine an item’s status are: (1)
degree of annexation to the real estate, (2) adaptation to the real
estate, and (3) the intention of the party who annexed the item to
the real estate.

These factors are discussed in more detail below.

An Additional Category: Ordinary Building Materials

Even when an item appears to be a fixture under the three-prong
test, if it is so incorporated into the underlying real estate that
it loses its separate character, it may be ordinary building
material instead. In this case, a fixture filing is not
appropriate. There is noper setest for determining whether
an improvement is comprised of ordinary building materials, and
states vary drastically in their conclusions. As with the
three-prong fixture test, the analysis is highly fact-specific. As
a general rule, materials used to build homes (such as wood, brick,
concrete, etc.) as well as items that take their ultimate shape
only upon installation, are more likely to be ordinary building
materials.

Recommendations

Determining whether financed items are goods, fixtures or
ordinary building materials can be complex. The factors described
above provide useful, but not conclusive, guidance regarding this
classification. Finance companies and other extenders of credit for
home improvement must evaluate the extent to which a financed item
is annexed to the underlying real estate, whether the item has been
adapted to fit the real estate and whether the objective facts
suggest an intention to make the item a permanent part of the real
estate. Further, if the item is integrally incorporated into the
real estate and has lost its separate identity, it likely
constitutes ordinary building materials.

In the event of uncertainty regarding an item’s status, a
filer may consider making a fixture filing. Presuming the filing is
made in good faith, this approach is expressly authorized under the
UCC as a “precautionary fixture filing.”

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.