Canadian Real Estate Law Blog

October 2005

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Subrogated Claims by Insurers in Commercial Leases

In a typical commercial lease each of the Landlord and Tenant will have various insurance obligations. Whether it is a multi-tenanted building or a single-tenanted building, typically the fire and extended coverage insurance for the building itself will be maintained by the Landlord. In a net lease the Tenant will pay the cost of that insurance (or the proportionate share of such cost if it is a multi-tenanted building).

In the event the Tenant (or one of its employees or other persons for whom it is responsible) causes damage to the building, the expectation of the Tenant would typically be that the Landlord should seek recovery from its insurer. The Tenant may subsequently be surprised if the Landlord’s insurer subrogates (stands in the shoes of the Landlord) and claims against the Tenant for the insurance proceeds paid out. The Tenant’s natural reaction would be that it paid the premiums on such insurance (or its proportionate share thereof) and to have to reimburse the Landlord’s insurer for the insurance payment would amount to paying twice. Yet it may have to do so depending on the terms of its lease.

The issue can be dealt with to the benefit of the Tenant if the Tenant negotiates for the appropriate provisions when it settles its lease. This will involve the Landlord agreeing to provide a waiver of subrogation from its insurer in the lease (where the insurer gives up its right to subrogate and proceed against the Tenant) or, alternatively, the Landlord specifically releasing the Tenant for all claims in respect of matters that are covered by the Landlord’s insurance, even if caused by the Tenant’s negligence (as the insurer can have no greater rights than the Landlord and if the Landlord has released the Tenant the insurer is bound by that release).

However, not all leases deal specifically with the issue. In those situations, in the event of damage, the lease must be reviewed to determine the intention of the parties as to who assumed the risk for any losses caused by fire or other insured perils caused by the Tenant’s negligence. The factors that the courts have considered are as follows:

1. if the lease contains an obligation of the Landlord to obtain fire insurance and an obligation of the Tenant to pay for it (or its proportionate share), then giving the lease a reasonable and business sense reading results in the risk passing from the Tenant to the Landlord. In this case the Landlord’s insurer could not successfully seek recovery;

2. where the Tenant’s repair obligations in the lease do not expressly exclude matters which the Landlord is intended to insure, this favours an interpretation whereby the Tenant retained the risk and could be held responsible;

3. where there is an express provision making the Tenant responsible for damage that it causes through its negligence, this shows an intent for the Tenant to retain the risk;

4. where the Tenant’s insurance obligations include legal liability coverage for the full replacement cost of the leased premises, this indicates an intent that the Tenant (and its insurer) should bear the risk.

These principles are relevant in interpreting any existing lease and show the importance of making sure that related components of any new lease being negotiated are consistent.

The recent Manitoba case of Sooter Studios Ltd. v. 74963 Manitoba Ltd. (2005) 32 R.P.R. (4th) 316 (Man. Q.B.) shows how the above principles will be applied. In that case the tenant sought a motion for summary judgment dismissing an action brought by the landlord’s insurer (subrogating through the landlord) where a building was extensively damaged by fire. The court held that the insurer’s claim could proceed because the lease did not contain an express provision that the tenant would not be liable to the landlord for damage to the leased property caused by its negligence and the court would not imply such a term where the lease did not have an express obligation of the landlord to insure and where the landlord was released from liability for damage caused by the tenant.

Bill Rowlands


October 28, 2005 in Leasing | Permalink | Comments (0)