The Niagara Falls Hydraulic Power and Manufacturing Company, Respondent, v. Julian H. Schermerhorn, as Trustee in Bankruptcy of Acker Process Company, Appellant

The Niagara Falls Hydraulic Power and Manufacturing Company, Respondent, v. Julian H. Schermerhorn, as Trustee in Bankruptcy of Acker Process Company, Appellant. Fourth Department, May 5, 1909. Landlord and tenant — agreement that buildings erected by lessee shall become property of lessor on termination of lease for non-payment of rent — such agreement valid— fixtures— chattel mortgage. A lease of lands to a manufacturing company provided that the lessor had a right to terminate the lease by notice if rent was not paid within thirty days from the time it became due. The lessee also had a right to terminate the lease at the end of any five-year period by giving written notice, and it was further provided that at the termination of the lease either by notice or by the expiration of the term or for any cause, the lessee could remove buildings and machinery erected by it provided the rent had been paid, such structures-to be regarded as personal property, but that the buildings should not be removed if the lease was terminated prior to a certain date, but should become the property of the lessor unless all rents had been fully paid, and if any part should remain unpaid, the buildings and machinery should be held by the lessor as collateral security for payment. The buildings erected by the lessee were destroyed by fire and the lessee being -in. default foryent, the lessor thereafter terminated the lease by a thirty-day notice. Held, that on the termination of the lease by the lessor because of the failure of the lessee to pay the rent, the buildings .belonged to the former and that the instrument could not be construed to mean that they were to become the property of the lessor only in case the lease was terminated by the lessee at the end of a five-year period. Parties to a lease may agree that any or all of the property placed upon or attached to the premises shall belong to the lessor upon the termination of the lease. Moreover, even in the absence of an agreement buildings and masonry of a substantial nature permanently attached to the land become the property of the lessor on the- termination of the lease. The lessee’s right to remove such structures depends upon an agreement to that effect. An agreement that permanent structures erected by the lessee shall become the property of the lessor on the termination of the lease for a failure to pay rent, even if creating a forfeiture, is not unconscionable, for the lessee is only required to pay the rent to avoid the effect of the agreement. The agreement aforesaid is not in the nature of a chattel mortgage so as to make the agreement void as against creditors of the lessee unless filed as required by the statute. McLennan, P. J., dissented. Appeal by the defendant, Julian H. Scliérmerhorn, as trustee, etc., from a judgment of the Supreme Court in favor of the plaintiff, entered in the office of the clerk of the county of Niagara on the 30th day of June, 1908, upon the decision of the court rendered after a trial at the Niagara Trial Term, a jury having been waived. The action is brought to recover the value of certain personal property, left over after a fire which burned the buildings and plant of the Acker Process Company, a foreign corporation of which the defendant was appointed the trustee in bankruptcy. The defendant sold the property, and the plaintiff contends that the property belonged to' it. The plaintiff is a power company at Niagara Falls and owns the lands upon which the process company’s buildings and plant were located. In 1899 the process company, desiring to carry on the business of manufacturing bleaching powder and caustic soda (Which is made from common salt) and other by-products, entered into a contract in Writing, dated June 14, 1899, by which the power company leased to the process company certain lands for twenty-five years, beginning on the 15th. day of February, 1900, and terminating on the 15th day of February, 1925, at an annual rental of $500. The lease was from time to time extended to lands additional to those described in the original lease, and the rent increased accordingly, so that eventually the annual rent for all the demised premises was $1,050, payable quarterly on the tenth days of May, August, November and February, and at the same time at which, the compensation for furnishing power (which will be presently referred to) was payable. The' agreement of June 14, 1899, further provided that the process company should use the demised premises for the purpose of erecting thereon buildings and plant for carrying on the business of manufacturing the products referred to, and that the power company should furnish the process company, for use on the premises, and not elsewhere, electric current to the extent of at least 3,200 horse power, in the manner specified in the agreement, at an annual rental of seventeen dollars and fifty cents per horse power, and should proceed with all reasonable dispatch, by ordinary methods, to install two turbine wheels, three electrical generators, and other electrical appliances necessary for the purpose of furpishing such power; that the process company should not use the "buildings and premises and plant for any purposes other than those specified, and that no electricity or electric power should be used thereon or therein, except that furnished by and with the consent of the power company. The power company installed the turbine .wheels, generators and other appliances as agreed, at a cost of $100,000 and upwards, and the process .company erected substantial buildings of masonry, metal and other substantial material, installed therein various machines^ piping systems, fixtures and appliances for carrying on its said business. The power company supplied' the power, and the manufacturing business was carried on until on or about February 25, 1907, when the fire occurred and practically destroyed the usefulness of the.buildings and plant. The 7th paragraph of the lease provided as follows: “Seventh. Payment for power shall be made on the 10th days of May, August, November and .February as above stated, and shall be made by the Lessee promptly and without any regard to any counterclaims whatever, if any exist. If such payment for power shall not be made promptly when due, the Lessor'may at its election, terminate this lease upon the following conditions : The Lessor shall give the Lessee thirty days’ notice of its election and intention so to terminate the lease, whereupon this lease and agreements shall be terminated at 'the expiration of thirty days from the service of such notice, to the same extent and effect as if the term of twenty- ■ five years hereinbefore provided shall have expired ; but if the Lessee shall within thirty days pay said rent and interest thereon,. such said notice shall be deemed to be of no effect and shall be considered as never having been served. Any claim or demand which the Lessee may have or claim to have against the Lessor shall,.if disputed, be the subject'of suit or adjustment against the Lessor, but shall not be an offset or counterclaim against any claim for rent hereunder.” The 15th paragraph of the lease provided for the lessee terminating the lease, and is as follows: “Fifteenth. It is further covenanted and agreed that the Lessee shall have the right to terminate this lease and agreement at. the end of .any period of five years during the continuance hereof, to wit, on.the 15th day of November in either of the years 1904, 1909, 1914 and 1919 by giving to the Lessor written notice of its intention t'o do so at least six months prior to the date of the proposed termination of such lease, the time to be specified therein,■ the same as if that date was the time originally fixed for the termination hereof.” The 16th paragraph relates to the rights of the respective parties in the buildings and plant when the lease is terminated, and is the one under which the power company claims title to the property in question. It reads as follows: “Sixteenth. At the termination of this lease and agreement either by notice or by expiration of the term or for any cause hereunder, the Lessee may except as hereinafter provided if all rental hereunder has been paid, remove from the premises leased hereunder or under any subsequent lease, all the buildings, machinery, fixtures and other property of the Lessee erected or placed on said premises by it, all of which is hereby regarded as personal property, but said buildings of the Lessee shall not be removed from the said premises if this lease be terminated prior to November 15th, 1909, but in case of the termination hereof prior to November 15, 1909, said buildings shall become and be the property of the Lessor, nor shall said buildings or machinery of the Lessee be removed from said premises subsequent to November 15, 1909, unless all rents hereunder reserved are fully paid as herein agreed, and if such rents or any part thereof shall remain unpaid, the said buildings, machinery, fixtures and property of the Lessee shall be held by the Lessor as collateral security for the payment thereof. During the term of this lease and agreement the Lessee may erect or. place upon the premises leased hereby or by any subsequent lease by the Lessor, all such buildings, machinery, fixtures and other property as may be necessary or proper for the purpose of its business as hereinabove described.” On the 1st day of Hay, 1907, there was due and owing to the power company rentals for land and power to the amount of $23,002.50, and on that day the power company served a thirty days’ notice as provided in the 7th paragraph of the lease. The rent was not paid, and the lease terminated on Hay 31, 1907. The power company notified the defendant trustee of its claim, but he disregarded the notice and took possession of the property in question, included it as part of the assets of the estate of the process company, and sold it. The trial court held that the provision holding the buildings and machinery as collateral security for the rent was, in effect, a chattel mortgage, governed by the statute relating to the filing thereof, and that since the lease and agreement had not been filed as provided-by the statute, it was void as to creditors; but'that under the other provision of the lease and agreement, permitting the power company to terminate the lease for non-payment of rent, and providing that if the lease was terminated before November 15, 1909, the buildings should belong to the power company, such buildings and any and all parts thereof, whether of machinery, fixtures, piping; or other material theretofore constituting a part of said buildings to the extent therein named, and-whether severed-from the freehold by reason of the fire or otherwise, became and were the property of the plaintiff, and entitled it to the lawful possession thereof. The value of the property so sold and converted by the> defendant trustee aggregates $44,166.94, which is the amount the trustee realized therefrom. Judgment was directed for that amount, less $7,116.23, the expense incurred in clearing, up the debris on the property in question, remelting the same and otherwise caring for and getting the same, ready for market, the amount for which judgment was directed being $37,050.71. The defendant appeals. Louis Marshall, for the appellant. Charles M. Harrington and John L. Romer, for the respondent. See Lien Law (Laws of 1897, chap. 418), § 90 et seq., as amd.— [Rep. [MAJORITY — Kruse, J.:] Kruse, J.: The primary question involved in this controversy is whether upon the termination of the lease under the 7th paragraph thereof, for non-payment of the rental, the buildings belonged to the lessor, the plaintiff power company.' If so, the further question is presented as to what part of the salvage left after the burning of the buildings and plant is a part of the buildings within the meaning of the provisions of the lease and agreement. As regards the latter question, the careful and exhaustive decision, supplemented by the opinion of the learned trial judge (60 Misc. Rep. 209), makes it clear just what items of the salvage were allowed, and their relation to the buildings^ and I think the conclusion there reached is correct, and that the amount recovered is none too large, unless, of course, the defendant is right on the main question. It is contended on behalf of the'defendant that the provision contained in the 16th. paragraph, which provides that if the lease is terminated prior to November 15, 1909, the buildings shall become and be the property of the lessor, relates to the termination of the lease by the lessee, under the option given it by the 15th paragraph, and that it was not intended to vest the title to the buildings in the lessor, where the lessor itself terminates the lease for a default in the payment of rentals. It is unnecessary to state the arguments ■urged by counsel for the respective parties for and against this contention. It seems to me that the language of the 16th paragraph does not admit of the construction contended for by the defendant. It is there explicitly provided that in case the lease is terminated prior to November 15, 1909, the buildings shall become and be the property of the lessor, and the right there given to the lessee, of removing the buildings, is subject to the qxpress exception and condition that all rental has been paid; and it is even provided that after November 15, 1909, the buildings or machinery shall not be removed from the premises unless all rents have been paid. It was entirely competent for the parties to contract that any or all of the property placed upon or attached to the premises should belong to the lessor upon the termination of the lease. Indeed, if there had been no express agreement in that regard, I think the buildings, constructed as they were of masonry and other material of a substantial nature, and permanently attached to the land, would have become a part thereof, and that the lessee would not have had the right to remove the same in the absence of any agreement giving him that right. Counsel for the defendant argues that the interpretation contended for on behalf of the plaintiff should not prevail, because .the effect thereof would be to impose upon the lessee a forfeiture of its property, which should be avoided. Assuming that the provision for a termination of the lease is a forfeiture and not a (Conditional limitation, as was held by the trial. court, it is not unconscionable, and its enforcement does no injustice to the lessee or its successor in interest, the defendant, since it was only necessary to pay the rent within the time after service of notice as provided by the lease, to avoid the effect of the provision. And it may be that the defendant could pay such past-due rent, even after that time, and be relieved from the effect of such default upon making a proper case for equitable relief. But no such relief was sought and is, not now asked, perhaps for the reason that the defendant trustee does not feel warranted in paying'the past-due rent and holding the property under the terms and conditions of the lease. If the only effect of this 16th paragraph, as regards the rights of the lessor in the buildings when the lease is terminated for the nonpayment of rent, is that of a chattel mortgage, as contended on behalf of the defendant, then I think the failure to file the mortgage, as the statute provides, makes the mortgage invalid as to creditors, and that the defendant, being h trustee in bankruptcy of the creditors, may successfully attack the mortgage upon that ground. (Skilton v. Codington, 185 N. Y. 80.) But I think to so interpret that paragraph would do violence to the plain and explicit language of the agreement. Such agreements as this are not uncommon between lessor and lessee, as will be seen by reference to the American and English Encyclopedia of Law, where the cases are collated (13 Am. & Eng. Ency. of Law [2d ed.], 655-673), and they should receive a fair and reasonable interpretation. The judgment should be affirmed, with costs. All concurred, except McLennan, P. J., who dissented. Judgment affirmed, with costs.