The Ontario Court of Appeal recently affirmed the long-standing, but frequently overlooked principle that where a landlord requires its tenant to contribute to the operating costs of a lease premises, the risk of loss covered by such insurance transfers to the landlord.
In 1044589 Ontario Inc. (Nantucket Business Centre) v. AB Autorama Ltd, the defendant/tenant operated an automotive repair shop from a unit it leased from the plaintiff/landlord in a multi-unit commercial plaza. The terms of the lease required the tenant to “pay all costs in respect of … Insurance” and to pay its proportionate share of “all costs incurred in the operation, maintenance, repair, replacement, management and insurance” of the entire premises. In 2005, a fire ignited inside the tenant’s leased premises, causing property damage, business interruption and a loss of profits. Accordingly, the landlord commenced an action against the tenant in negligence for the resulting damages. The parties asked the Court, by way of motion, to determine whether the lease precluded the landlord from maintaining its action against the tenant.
The motions judge held that since the landlord was not required to insure the premises, the risk of loss remained with the tenant, who was required to procure insurance under the lease. The Court of Appeal disagreed. Relying on a trilogy of Supreme Court of Canada decisions from the 1970s, the Court of Appeal held that by requiring the tenant to contribute to the costs of its costs of insurance, the risk of loss was allocated to the landlord.
At first glance, the Court of Appeal’s decision appears contradictory. Why should a landlord be deemed to assume the risk of loss for damages negligently caused by its tenant, by requiring the tenant to contribute to its overall insurance costs? This result seems especially curious since the tenant in this case was specifically required to procure its own insurance. A close examination of the Court of Appeal’s reasoning provides useful insight. First, the Court held that where a tenant pays for insurance, it is entitled to the benefit of such insurance. By commencing an action against its tenant for a loss covered by that insurance, a landlord would be effectively depriving the tenant of the benefit which it was required to pay for in the first place. The Court noted that this benefit could only be revoked by an express provision in the lease. The Court held that this result made commercial sense: although the landlord was not required to insure its premises, it would defy commercial reality for the landlord not to do so.
The Court’s reasoning in this case may be of interest to tenants involved in litigation with their landlords. Specifically, this decision can likely be extended to stand for the proposition that where a tenant is required to contribute to its landlord’s insurance costs, the risk of loss covered by that insurance is allocated to the landlord, and the tenant is immune from an action for any resulting damages.
In 1044589 Ontario Inc. (Nantucket Business Centre) v. AB Autorama Ltd, the defendant/tenant operated an automotive repair shop from a unit it leased from the plaintiff/landlord in a multi-unit commercial plaza. The terms of the lease required the tenant to “pay all costs in respect of … Insurance” and to pay its proportionate share of “all costs incurred in the operation, maintenance, repair, replacement, management and insurance” of the entire premises. In 2005, a fire ignited inside the tenant’s leased premises, causing property damage, business interruption and a loss of profits. Accordingly, the landlord commenced an action against the tenant in negligence for the resulting damages. The parties asked the Court, by way of motion, to determine whether the lease precluded the landlord from maintaining its action against the tenant.
The motions judge held that since the landlord was not required to insure the premises, the risk of loss remained with the tenant, who was required to procure insurance under the lease. The Court of Appeal disagreed. Relying on a trilogy of Supreme Court of Canada decisions from the 1970s, the Court of Appeal held that by requiring the tenant to contribute to the costs of its costs of insurance, the risk of loss was allocated to the landlord.
At first glance, the Court of Appeal’s decision appears contradictory. Why should a landlord be deemed to assume the risk of loss for damages negligently caused by its tenant, by requiring the tenant to contribute to its overall insurance costs? This result seems especially curious since the tenant in this case was specifically required to procure its own insurance. A close examination of the Court of Appeal’s reasoning provides useful insight. First, the Court held that where a tenant pays for insurance, it is entitled to the benefit of such insurance. By commencing an action against its tenant for a loss covered by that insurance, a landlord would be effectively depriving the tenant of the benefit which it was required to pay for in the first place. The Court noted that this benefit could only be revoked by an express provision in the lease. The Court held that this result made commercial sense: although the landlord was not required to insure its premises, it would defy commercial reality for the landlord not to do so.
The Court’s reasoning in this case may be of interest to tenants involved in litigation with their landlords. Specifically, this decision can likely be extended to stand for the proposition that where a tenant is required to contribute to its landlord’s insurance costs, the risk of loss covered by that insurance is allocated to the landlord, and the tenant is immune from an action for any resulting damages.
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