We have often seen the devastating effects of businesses investing their money in the wrong commodity but businesses also make the mistake of how capital investments are affected.
Case on point which we reported previously was where a ‘Worrells File’ spent significant amounts on constructing and fitting out a building on land leased from a state government body. Once the construction was complete, at great cost to the company, it then effectively ceased to be an asset of the business and became an asset of the landlord at no cost to them. Such a windfall could be perceived as a good thing (for the landlord), but insult to financial injury hits hard when the landlord discards such fittings for the purposes of re-leasing, or raises the rent for the same tenant in the next period because of the ‘improvements’ to the land!
And it has happened again. A current liquidation in our office operated a business in rented premises. It has a significant and costly piece of capital equipment ‘installed’ into that building – at least this time it did not construct the building itself. The purchase of that capital equipment was financed through one of the major finance companies, with the standard personal guarantee from the director. Most of these loan monies are still outstanding.
The landlord, who is also owed significant monies under the lease and also has a personal guarantee from the director, is arguing that the equipment is installed in a way that makes it part of the building and hence is a fixture and fitting – meaning that the finance company cannot repossess the equipment. The finance company is arguing the opposite by stating it can be disassembled and removed from the building, and so is still their property under their security.
Our hands are tied at this juncture and are waiting for the outcome. The director is unfortunately now facing two claims under personal guarantees granted, regardless of who wins the ownership argument. Even in the case that the equipment is removed, there is an enormous shortfall between the loan amount and the current value. Least of all will be the quandary of finding a buyer for the disassembled equipment in this market.
The lesson clearly is that, if capital equipment is to be installed in someone else’s building make sure they can be easily removed and, preferably, get the landlord’s written agreement in advance for their removal.