Prior Uniform Statutory Provision: Section 7, Uniform Conditional Sales Act.

Changes: Changed in substance.

Purposes of Changes:

1. To state when a secured party claiming an interest in goods as fixtures under this Act is entitled to priority over a person claiming an interest in the same goods by reason of the law applicable to real estate.

2. This Section, like Section 7 of the Uniform Conditional Sales Act, leaves it to other law to determine when chattels become realty by affixation except to the extent that the first sentence of subsection (1) makes clear that the Section does not apply to structural materials.

3. Where a security interest in the goods as chattels has attached before affixation, subsection (2) gives the secured party priority over all prior claims based on an interest in the realty. If the secured party perfects his interest by filing, which he may do in advance of affixation, he takes priority over subsequent realty claims as well. So long as he fails to perfect his interest he may, however, be subordinated to the subsequent claimants described in subsections (4)(a), (b) and (c). The last sentence of subsection (4) on purchasers at foreclosure sales clarifies a point on which prior decisions have been in conflict.

4. Subsection (3) permits a chattel interest to be taken in goods after they have become fixtures. In this case the secured party has the same rights against subsequent real estate interests as when his interest was taken before affixation. However the post-affixation security interest is invalid against prior real estate claims unless they agree in writing to a subordinate status. The reason for the distinction taken, as to prior real estate claims, between the pre-affixation and post- affixation security interest is that in the former case the value of the real estate is presumably being increased by the addition of the fixture, while in the latter case value, on which the real estate encumbrancer may have counted, is being in a sense deducted from the real estate by the separate financing of a part of it as a fixture.

5. Subsection (5) is an important departure from Section 7 of the Uniform Conditional Sales Act and from much other conditional sales legislation. Under the Uniform Conditional Sales Act a conditional vendor could not sever and remove the affixed chattel if a "material injury to the freehold" would result. The courts of various jurisdictions were in sharp disagreement on the meaning of "material injury" some held that only physical injury was meant; others adopted the so-called "institutional theory" and denied removal whenever the "going value" of the structure would be materially diminished by the removal. Under these rules the conditional vendor either could not remove at all, or, if he could, could damage the structure on removal without becoming accountable to the real estate claimant. The situation was complicated by the fact that it became increasingly difficult to predict what types of goods the courts in a given jurisdiction would hold not subject to removal.

Subsection (5) abandons the "material injury to the freehold" rule. Instead a secured party entitled to priority may in all cases sever and remove his collateral, subject, however, to a duty to reimburse any real estate claimant (other than the debtor himself) for any physical injury caused by the removal. The right to reimbursement is implemented by the last sentence of subsection (5) which gives the real estate claimant a statutory right to security or indemnity, failing which he may refuse permission to remove. The subsection (5) rule thus accomplishes two things: It puts an end to the uncertainty which has grown up under the "material injury" rule, while at the same time it protects the real estate claimant under the reimbursement provisions.

6. Under this Article as under the Uniform Conditional Sales Act the place of filing with respect to goods affixed or to be affixed to realty is with the real estate records and not with the chattel records. See Section 9-401 on the place of filing and Section 9-402 on the form of financing statement.

Cross References:

Sections 9-102(1), 9-104(j) and 9-312(1).

Point 3: Sections 9-204(1), 9-303 and 9-402(1).

Point 5: Part 5.

Point 6: Sections 9-401(1)(b) and 9-402.

Definitional Cross References:

"Collateral". Section 9-105.

"Contract". Section 1-201.

"Creditor". Section 1-201.

"Debtor". Section 9-105.

"Goods". Section 9-105.

"Knowledge". Section 1-201.

"Person". Section 1-201.

"Purchase". Section 1-201.

"Purchaser". Section 1-201.

"Secured party". Section 9-105.

"Security interest". Section 1-201.

"Value". Section 1-201.

"Writing". Section 1-201.

As stated in Senate Standing Committee Report No. 676-78, the following material is added to the official Code Commentary:

As used in Section (6) it is suggested that "completion of construction" be determined in accordance with normally recognized periods of construction. Consequently, it is suggested that an acceptable standard would be to consider construction to have been completed as of ninety (90) days after the issuance by a responsible county agency of a certificate of occupancy or similar certificate certifying that the improvements have been completed in accordance with applicable county building and similar standards. Where the construction of improvements does not require the certificate of occupancy or similar certificate, then the "completion of construction" likewise could be determined to be ninety days after an affidavit of publication of notice of completion has been filed in the office of the clerk of the circuit court where the subject property is situated, as provided in Section 507-43(f) of the Hawaii Revised Statutes.