Subrogation by Landlord’s Insurer Permitted Despite Tenant’s Rent Being Applied to Landlord’s Insurance Premiums

1044589 Ontario Inc. (Nantucket Business Centre) dealt with the frequently-litigated issue of the right of a landlord’s insurer to advance a subrogated claim against a tenant. Here, Madam Justice Ruth E. Mesbur held that the landlord’s insurer was entitled to proceed with the subrogated claim, even though payment of the premiums had come, in part, from the tenant.

This was a commercial tenancy in a strip mall. A fire broke out in the tenant’s automobile repair shop and the landlord’s insurer sued the tenant for recovery, alleging negligence on the part of the tenant. The relationship between the parties was governed by an offer to lease, a formal lease not yet having been entered into by the time of the fire.

The tenant was contributing a proportionate share to the cost of the landlord’s fire insurance premiums. On this motion, the tenant argued that this fact resulted in the risk of loss by fire having been assumed by the landlord, with the result that the landlord could not sue the tenant for damages caused by its negligence.

Justice Mesbur did not accept the tenant’s argument. Key to her decision was the fact that the lease did not contain an express provision requiring the landlord to insure the premises against loss by fire. Her Honour relied on the case of Lee-Mar Developments Ltd. v. Monto Industries Ltd. [2000] O.J. No 1332 (S.C.J.), affirmed [2001] O.J. No. 987 (C.A.).

The Court of Appeal’s ruling in Lee-Mar actually said very little. In fact, it is a little difficult to follow. The following is the entire decision:

1 We wish to thank both counsel for their able arguments. This case arose on a Special Case under Rule 22 of the Rules of Civil Procedure.

2 The question passed restricts the court to determining the issue on its basis of the terms of the legal only. We are not persuaded that the judge below erred in her interpretation of the parties’ intentions based on those provisions. Accordingly the appeal is dismissed with costs.

(What does “on its basis of the terms of the legal only” mean?)

In any event, Justice Mesbur said that this case was like Lee-Mar, in that:

  1. There was no covenant to insure on the part of the landlord;
  2. The reference to the landlord’s insurance appeared in a section of the lease that dealt with payments to be made under it;
  3. Both contained “entire agreement” clauses;
  4. Both the Lee-Mar lease and the offer to lease in this case were described as a “completely carefree” net lease to the landlord.

Her Honour considered that these and some other factors led to the conclusion that it had been the intention of the parties, that the tenant be responsible for damage resulting from its failure to operate the business in a safe manner.

As mentioned above, it appears that a factor that was of particular significance to Justice Mesbur was the fact that the offer to lease contained no express covenant to insure. She said, “Here, the landlord points to the fact that in each of the trilogy cases, there was an express provision requiring the landlord to insure the premises against loss by fire. Here, there is no such express provision, and thus the landlord says the trilogy cannot apply. The landlord goes further, and says that the express wording of the offer to lease leads to the same conclusion. I agree.”

The “trilogy” refers to a series of Supreme Court of Canada cases that dealt with the issue of the right on the part of a landlord’s insurer to bring a subrogated action against a tenant: Agnew-Surpass Shoe Stores Ltd. v. Cummer-Yonge Investments Ltd.,  [1976] 2 S.C.R. 221; Ross Southward Tire Limited v. Pyrotech Products Ltd.,  [1976] 2 S.C.R. 35, and T. Eaton Co. v. Smith et al., [1978] 2 S.C.R. 749, [1978] 2 S.C.R. 749.

In fact, contrary to what this decision indicates, in Ross Southward v. Pyrotech, there was not an express covenant by the landlord to insure. Despite that, the Supreme Court concluded there, that because the tenant was obliged to pay the insurance premiums, no subrogated action could be maintained against it. In Ross Southward, the tenant had argued that the court should infer a covenant by the landlord to insure (this is made clear in the reasons of the Court of Appeal in that case). The reasons of Chief Justice Laskin make it clear that the Court’s decision was not based on the existence of a covenant by the landlord to insure:

Counsel for the appellant [the tenant] did not urge (indeed, he stated that it was not necessary to his position) that the landlord was in breach of a covenant to insure and that the covenant should have embraced risk of loss by fire resulting from the tenant’s negligence. Rather, it was his contention that under the provision of the lease respecting payment of insurance rates by the tenant, the risk of loss by fire passed to the landlord, at least upon the presentation by the landlord of the insurance bill, and that the matter thereafter was between the landlord and its insurer. I agree with this contention. Applying to the lease and to the provision in question the ordinary test of reading it reasonably and in a business sense, I see no other meaning that can be given to the lease short of reading the relevant words out of it.  [para. 8]

 Three things strike us about Justice Mesbur’s decision:

First, she expressly said that the trilogy did not apply. But how can this statement be reconciled with the decision in Ross Southward, which turned on the fact that the tenant had been required to pay the premiums of the landlord’s insurance policy, in the absence of any covenant by the landlord to insure, a set of facts which mirrors those here?

Secondly, might it not be reasonable to infer an obligation to insure on the part of the landlord from the fact that the tenant was required to pay the premiums? How could there be any such obligation on the part of the tenant if it was not assumed by both parties that the landlord would obtain insurance? A covenant to insure was inferred by another Superior Court justice in similar circumstances: Independent Tank Cleaning v. Zabokrzycki 1997 CarswellOnt 666, where Browne J. said:

There is no express written covenant between the landlord and tenant that fire insurance would be obtained by the landlord for the benefit of both. My conclusion is that the landlord had agreed to insure the property against fire. My conclusion is that there is an inferential covenant in the leasehold arrangement that the landlord insure the property against fire and that as a result of that inferential conclusion, there is a clear covenant between landlord and tenant that the fire insurance obtained by the landlord is for the benefit of both landlord and tenant which results in a bar to the subrogated action by the insurer. [para. 20]

Finally, does it make any sense to place such emphasis on whether there is or isn’t a covenant to insure on the part of the landlord? Obviously, in all of these cases in which the tenant is paying some or all of the landlord’s insurance premiums, everyone proceeds on the assumption that there is, in fact, an insurance policy that has been taken out by the landlord. Isn’t the significant factor the legal significance of the tenant’s obligation to pay the premiums on the insurance policy?

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