Lease Terms Govern Subrogation Rights says ONCA

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

In Royal Host GP, the Ontario Court of Appeal overturned a decision of a motion judge and ruled that a tenant was not entitled to the benefit of the fire insurance that the landlord had covenanted to purchase where the loss was caused by the tenant’s own negligence.

The appellant, Royal Host GP Inc. (“Royal”), owned a large commercial building in which the respondent, 1842259 Ontario Ltd. (“184”), leased space.  184 was a restaurant operator and its kitchen was the source of a fire that extensively damaged the building.  Royal was indemnified by its insurer and its insurer commenced a subrogated action.

The decision turned on the interpretation of a clause of the lease whereby the landlord covenanted to obtain fire insurance on the building and add those costs to the common expenses of the tenants.  In the same section, the lease provided that the tenant “is not relieved of any liability arising from or contributed to by its acts, faults, negligence or omissions”.  At first instance, the motion judge relied on a trilogy of 1970s Supreme Court of Canada decisions for the proposition that the inclusion of the insurance covenant in the lease is a benefit for the tenant, and that such a covenant and benefit would be meaningless if the landlord’s insurer could bring a subrogated action against the tenant.  The motion judge further relied on the principle that as the tenants had paid for the insurance, they should get the benefit.  Finally, the motion judge found that the negligence exception in the lease was intended to ensure that the tenant would not be relieved of liability only as to third parties.

On appeal, the court found that the trilogy of Supreme Court cases – Agnew-Surpass v. Cummer-Yonge, [1976] 2 S.C.R. 221; Ross Southward Tire v. Pyrotech Products, [1976] 2 S.C.R. 35; and  T. Eaton Co. v. Smith et al., [1978] 2 S.C.R. 749 – stood for the lease being the primary means of determining the rights and obligations between landlord and tenant and not the insurance policy.  At paragraph 16, Juriansz J.A. maintained that the trilogy “has not affected the fundamental tenet of contractual interpretation that it is necessary to discern the intentions of the parties in accordance with the language they have agreed to in the contract”.  Focusing on the plain meaning of the insurance clauses in the lease, the Court found that the plaining meaning of the “notwithstanding” provision resulted in the conclusion that “tenant remains liable for its own negligence notwithstanding the landlord’s covenant to purchase insurance and the tenant’s contribution for the cost of that insurance” (para 22).  Finally, when the Court looked to the broader context of the contract, it found only further evidence of this “plain meaning” interpretation, for instance, a separate provision that excludes the tenant from bringing subrogated actions against the landlord, which draw a stark contrast with the lack of any subrogation exclusion in the clause that is at the heart of this decision.

Royal Host GP stands for the proposition that despite layers of insurance policies, it is still the lease alone that governs the landlord and tenant relationship, and that a harsh result will not preclude the Court from looking first and foremost to the plain meaning of the agreement.

What Insurers Should Know

This decision by the ONCA makes clear that the insurance arrangements in a contract must be read together with all of the other terms including the indemnification terms. Past cases which have restricted the rights to subrogate or to claim indemnification need to be re-examined in light of this decision.

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Shawn O’Connor Hamish Mills-McEwan, Articling Student