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Subrogated Claims by Insurers in Commercial Leases (Part V)

This post follows the entries of Bill Rowlands on October 28, 2005, August 29, 2006, March 6, 2007 and February 26, 2008 discussing the ability of an insurer of a landlord to proceed against a tenant to recover from the tenant amounts paid out by the insurer under an insurance claim by the landlord. That is referred to as a subrogated claim.

 In 1044589 Ontario Inc. c.o.b. Nantucket Business Centre v. AB Autorama Ltd. (2008 CanLii 39435 ONSC), the parties had not signed a formal lease and their relationship was governed by the Offer to Lease. A fire started as a result of the tenant’s operations and caused damage to the premises, its contents, an interruption of the tenant’s business and a resulting loss of profits.

 The issue facing the court was whether the terms of the Offer allowed the landlord to sue the tenant for damages, (and its insurer to sustain a subrogated claim) or whether, when it included insurance as part of the costs of the tenant’s proportionate share of the cost of the premises, the landlord assumed the risk of damage by fire, and thus may not sue the tenant for damages arising from the tenant’s negligence.

The court looked to the express language of the Offer and found it to be similar to that at issue in Lee-Mar Developments Ltd. v. Monto Industries Ltd. ([2000] O.J. No. 1332 (S.C.J.)). Following the reasoning in Lee-Mar, the court found: (1) there was no covenant in the Offer obliging the landlord to take out insurance on the property; (2) the only express insurance obligation in the Offer was on the tenant, requiring the tenant to maintain commercial liability insurance; (3) the Offer contained an “entire agreement” clause and therefore there were no collateral agreements of obligations outside those in the Offer; and (4) the description of the Offer as “completely carefree” supported the landlord’s position.

The court held that, on the basis of the above factors, the parties intended that the tenant assume the risk for any losses caused by the tenant’s negligence. The plaintiff was not precluded from pursuing its claim against the defendant. 

In addition to offering guidance as to when a tenant may not be protected from a subrogated claim, this case is also a reminder that it may be useful to pursue the formal lease and not live under any offer to lease. The lease negotiations may have resulted in some language that might have impacted the decision. For example, there may well have been a covenant of the landlord to insure in the formal lease 

Bob Fraser .

October 7, 2008 in Leasing | Permalink

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