Subrogation up in Flames? 

Taking a peek into the court’s understanding of subrogation in the commercial tenant context

In the case of Royal Host GP Inc. v 1842259 from 2018, the Ontario Court of Appeal made a sweeping decision concerning a commercial landlord’s right to subrogate. At a basic level, subrogation is a right of an insurance companies to pursue legal action against a third party that caused the loss in the first place.

In the case at hand, the appellant, who is a landlord, owns a multi-story hotel. A portion of the building was leased to the respondent, who is a tenant of the building who leased a portion of it in which they operated their restaurant. As a part of their lease agreement, the landlord was required to obtain fire insurance, to which the tenant contributed funds to. Another part of the lease included a provision which stated that the tenant was “not relieved of any liability arising from or contributing to by its acts, faults, or negligence.[1] A fire eventually broke out in the restaurant’s kitchen, which caused extensive damage to the building. The insurance company identified the appellant as the one responsible for the cost of the damages to the building. The appellant’s insurer then began the subrogated action, seeking recovery of the damages suffered.[2]

When this case was brought to court, the motion judge dismissed the appellant’s action based on the Trilogy, which refers to three Supreme Court of Canada decisions: those being Agnew-Surpass v. Cummer-Yonge (1976), Ross Southward Tire v. Pyrotech Products (1976), and T. Eaton Co. v. Smith et al. (1978).[3] These cases together set out the basis for the analysis of commercial leases in subrogation claims. The Trilogy sets out two principles: first, a landlord’s covenant in a lease to insure the building is a contractual benefit enjoyed by the tenant, and that the tenant would receive no benefit if the landlord could sue them for damages due to their negligence. Second, when a tenant pays for the insurance coverage, it should gain the benefit of the insurance coverage. The motion judge cited that “as a general rule, courts have limited subrogation rights of an insurer when a landlord covenants to pay for the insurance and agrees to look to its own insurer for any loss.”[4] The motion judge concluded that “the language of the lease does not clearly and expressly reflect that parties’ joint intention of permitting the landlord’s insurer to recover damages from the defendants in the event of a fire loss caused by the defendants.”[5]

Despite the ruling of the motion judge, the Court of Appeal held that the judge erred in their interpretation of the Trilogy, stating that the Trilogy determined that it is the terms of the lease that establish rights an obligations between landlord and tenant, not insurance policy. The Appeal Court held that the crux of the case focused on the impugned provision of the lease, which stated that the landlord would covenant to purchase fire insurance on the building, and required the tenant to pay their proportionate share of its cost. However, if the first part of this provision were interpreted alone, the tenant would be granted protection under the landlord’s insurance. Despite the way the provision reads, there was a clear notwithstanding clause in effect that excluded the tenant from “i) relief from liability, ii) interest in insurance, and iii) proceeds of insurance.”[6] The court stated that “to alter the allocation of risk represented by the covenant to insure, express language must be used.” Therefore, it was decided that the notwithstanding clause explicitly and unambiguously provided that the tenant would remain liable for their own negligence regardless of their contribution to the building’s insurance.[7]

To reiterate, this case is important in its distinction of a landlord’s right to subrogate. The Court of Appeal’s final decision stated that the language used in a commercial lease is of the upmost importance when determining a landlord’s right to subrogate. If the language used is not clear, concise, and unambiguous, the Supreme Court Trilogy will continue to apply the common law principle that the tenant will receive protection from the landlord’s insurance[8], regardless of how any damage was caused, fault of the tenant or not. While this might sound like a broken record for this blog, we continue to see courts use common sense in deferring to the plain language of the contract in determining how best to proceed.

We would like to thank our student Nicole Rocha for her help researching this topic.

If you have any questions regarding your residential or commercial lease, please reach out to us!

 

[1] Karen L. Weslowski, “Clarifying the “Trilogy” and the Covenant to Insure: Royal Host GP Inc. v 1842259 Ontario Ltd..” June 22^nd, 2018, https://www.millerthomson.com/en/blog/mt-insurance-law-blog/clarifying-the-trilogy-and-the-covenant-to-insure-royal-host-gp-inc-v-1842259-ontario-ltd/, accessed February 13^th, 2023.

[2] Joshua Marych, “The Commercial Landlord’s Right To Subrogate,” September 15^th, 2022 https://www.mondaq.com/canada/landlord-tenant–leases/1230144/the-commercial-landlord39s-right-to-subrogate, accessed February 13^th, 2023.

[3] Ibid.

[4] Royal Host GP Inc. v. 1842259 Ontario Ltd., 2018 ONCA 467.

[5] Ibid.

[6] Supra note 2.

[7] Ibid.

[8] Ibid.