Court File and Parties

COURT FILE NO.: 1906/13 DATE: 20170705 SUPERIOR COURT OF JUSTICE - ONTARIO

RE: Royal Host GP Inc. in its capacity as the general partner of the Royal Host Limited Partnership, Plaintiff AND: 1842259 Ontario Ltd., Mao Hui Zhang, Tian Xing Yang and Dong Jiang, Defendants

BEFORE: Justice M. A. Garson

COUNSEL: S. Atkinson, for the plaintiff D. Rabinowitz, for the defendants

HEARD: May 31, 2017

Endorsement

Introduction

[1] This action arises out of a fire loss that occurred on October 22, 2011 at 450 Memorial Ave., Thunder Bay, Ontario (“the fire”). The plaintiff landlord commenced the action against one of its tenants, 1842259 Ontario Ltd. (“184”), for negligence and the plaintiff’s insurer now advances a claim through its right of subrogation.

[2] As a term of the lease, 184 contributed to the premiums for insurance coverage provided by the landlord.

[3] This matter comes before the court by way of a special case under r. 22. The sole issue for determination is whether the plaintiff is precluded from proceeding by way of subrogated action against the defendants by virtue of the terms of the lease.

[4] 184 was not the only business at the premises and did not lease the entire space. The lease was the sole document governing the relationship between the parties.

Background and Discussion

[5] The plaintiff is the owner of a multi-storey commercial building from which it operates a Travelodge Hotel. Attached to the hotel was a space from which the defendants, Mr. Zhang, Mr. Yang and Mr. Jing, operated a restaurant known as “Sushi Station” through their corporation, 184. The defendants leased the restaurant space from the plaintiff pursuant to a lease agreement entered into on February 25, 2011 (“the lease”).

[6] There is no dispute that the lease was valid and in effect at all material times and governed the relationship between the parties.

[7] The fire, which broke out in the restaurant’s kitchen, caused extensive fire and smoke damage to the building. The plaintiff was indemnified by its insurer for losses it sustained as a result of the fire.

[8] The plaintiff, through its insurer, commenced the within subrogated action seeking recovery of damages from the defendants based on allegations that they caused the fire through their negligence. The defendants deny responsibility for the fire and submit that the plaintiff is estopped from bringing this action as a result of the terms of the lease.

[9] These losses included emergency services, extensive restoration costs, damaged contents and the loss of income suffered while the hotel was closed and being repaired. I now turn to the specific sections of the lease.

[10] I need only reproduce the most relevant portion of the lease, which states:

Section 7.02 – Landlord’s Insurance – Mandatory,

The Landlord shall take out and maintain to the full replacement value, fire and other hazard insurance, as the Landlord in its sole discretion may deem advisable, on the building, excluding any property thereon with respect to which the Tenant or any other tenants are obliged to insure, and its own general liability insurance, including general liability insurance in respect of the Common Areas in the amount no less than $10.0 million in respect of any injury to or death of one or more persons and loss or damage to the property of others, the costs of which shall be included in the Common Expenses. Notwithstanding the Landlord’s covenant containing this s. 7.02, notwithstanding any contribution by the Tenant to the cost of any policies of insurance carried by the Landlord, the Tenant expressly acknowledges and agrees that:

(i) The Tenant is not relieved of any liability arising from or contributed to by its acts, faults, negligence or omissions;

(ii) No insurable interest is conferred upon the Tenant under any policies of insurance carried by the Landlord, and

(iii) The Tenant has no right to receive any proceeds of any policies of insurance carried by the Landlord.

[11] Like any negotiated commercial document, the court must construe the agreement in accordance with sound commercial principles and good business sense. The agreement must be construed as a whole and interpreted in a manner that reflects the true intentions of the parties. See Scanlon v. Castlepoint Development Corp. (1992), 11 O.R. (3d) 744 (Ont. C.A.); Bell Canada v. The Plan Group, 2009 ONCA 548, 96 O.R. (3d) 81, at para. 37.

[12] I am mindful in my interpretation that the parties have agreed in section 10.22 that the doctrine of contra proferentem shall not apply.

[13] The starting point for my analysis is the basic principle that a tenant is liable for damages to a landlord unless the terms of the lease provide otherwise. Similarly, the right of the landlord’s insurer to subrogate against a tenant exists unless the terms of the lease provide otherwise.

[14] As a general rule, courts have limited the 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. See the following trilogy of Supreme Court of Canada cases: (i) Agnew-Surpuss Shoe Stores Ltd. v. Cummer-Young Investments Ltd., [1976] 2 S.C.R. 221; (ii) Ross Southport Tire Ltd. v. Pyrotech Products Ltd., [1976] 2 S.C.R. 35; and (iii) Smith et al. v. T. Eaton Co., [1978] 2 S.C.R. 749.

[15] The results depend not on the terms of the insurance policy but rather on the terms of the lease. Put another way, the insurer should be in no better position than the landlord. See Amexon Realty Inc. v. Comcheq Services Ltd., 37 O.R. (3d) 573 (Ont. C.A.), at para. 8.

[16] Where a landlord covenants to obtain insurance for fire damage, the landlord is barred from recovering from the tenant for losses caused by fire. See Madison Developments Ltd. v. Plan Electric Co., 36 O.R. (3d) 80 (Ont. C.A.), at para. 9. The exception to this general rule is where the lease contains clear, express and unambiguous language that permits such recovery by the landlord.

[17] As a result, the focus turns to the terms of the lease and the parties’ intentions. The plaintiff suggests that there are specific wordings and sections of the lease that make it clear that the parties expressly agreed to contract out of the general rule barring the landlord’s insurer from subrogating against 184.

[18] The plaintiff concedes that the inclusion of the landlord’s covenant to insure, which requires the tenant to contribute towards the cost of maintaining such insurance, typically is sufficient to preclude the insurer from pursuing the tenant for damages, including those caused by the tenant’s own negligence.

[19] However, the plaintiff argues that clear, unambiguous and express language within the lease is sufficient to preserve the right of the landlord’s insurer to pursue the tenant. More specifically, the plaintiff relies on the wording dealing with the landlord’s covenant to insure in section 7.02 which states in part that:

…The Tenant is not relieved of any liability arising from or contributed to by its acts, fault, negligence or omissions.

[20] The plaintiff suggests it is difficult to conceive wording that could be any clearer with respect to the tenant remaining liable for its own negligence.

[21] Additionally, the plaintiff points to other clauses in the lease that refer to the tenant’s responsibility for damages caused by its own negligence. For example, the repair clause in s. 5.05 which reads, in part:

The Tenant covenants with the Landlord to decorate and to make all repairs and replacements to and to maintain in first class order and repair the Demised Premises (…) expect only for Structural Repairs and for repairs necessitated by damage for which the Landlord has insured or is obligated to insure pursuant to the Lease (in each case unless such repairs are necessitated by the acts or omissions of the Tenant, its agents, employees, invitees or licensees).

[22] The plaintiff argues that these sections demonstrate that it is the tenant who assumes risk of liability if the fire is caused by its negligence. I disagree. I do not accept that the terms of the lease expressly preserve the right of subrogation by the landlord’s insurer against the defendants.

[23] The plaintiff relies on the decision in Lee-Mar Developments Ltd. v. Monte Industries Ltd. (2000), 18 C.C.L.I. (3d) 224 (Ont. Sup. Ct.), aff'd (2001), 146 O.A.C. 360. In that case, which also came before the court as a special case under r. 22, an explosion occurred at a property followed by an ensuing fire which completely destroyed the building’s interior as well as causing significant structural damage. Both the landlord and the tenant were insured for the loss.

[24] There was no express covenant that fire insurance be obtained by the landlord. The tenant was obligated to take out legal liability insurance for the full replacement cost of the premises.

[25] Chapnik J. found that the clause on repairs expressly took priority over other provisions in the lease. She also determined that although there was an express bar against subrogation by the tenants’ insurers, there was not a similar provision with respect to the landlord’s insurers. In the end, she determined that the terms of the net lease clearly reflected the parties’ joint intention to permit the landlord’s insurer to recover from the tenant for payments made to the landlord to pay for the repair to the building.

[26] I distinguish the decision in Lee-Mar from the facts before me for several reasons.

[27] First, the landlord in Lee-Mar did not expressly covenant to obtain insurance for the building. I am mindful that the court in Lee-Mar made clear that even if a landlord’s covenant to insure has been inferred, the outcome would be no different. In my view, and in the context of the terms of the lease before me, such express covenants are for the benefit of the tenant even where the risk of loss is a result of the tenant’s negligence. It would defeat the purpose of the covenant to permit the insurer to look to the tenant for recovery after the lease clearly required the landlord to seek recovery from the insurer and not 841. See Provident Bank v. Wells Fargo Bank Northwest, 208 O.A.C. 274 (Ont. C.A.), at para. 27. There would be no benefit to the tenant from the landlord’s covenant to insure if the covenant did not apply. After all, the landlord’s covenant to insure is for the benefit of the tenant. The landlord has agreed to insure for fire loss and the tenant is obliged to pay the associated costs.

[28] Secondly, the lease specifically addresses the issue of subrogation in s. 7.04 which requires 841 to take out and maintain no less than $5,000,000 in commercial general liability insurance and that such insurance shall

Exclude the exercise of any claim by the Tenant’s insurer against the Landlord by subrogation…

[29] Had the parties intended to create an exception to the well-established general principle, they could have used similarly clear and unambiguous language permitting the landlord’s insurer a right to subrogate against 841. They did not. The law is clear.

[30] I specifically reject the submission of the plaintiff that the only reasonable reference to be drawn from the absence of such language is that the parties never intended to restrict the subrogation rights of the landlord’s insurer. Contracting out of the well-established and clear general principles from the trilogy of Supreme Court of Canada decisions requires more than a reasonable inference from the absence of an express clause. Put another way, I am not left with the impression that the drafters of the lease, cognizant of the general rule, inserted clear, express and unambiguous language to circumvent its effect.

[31] Unlike in Lee-Mar where the court found the clauses to be clearly reflective of the parties’ intentions, the repair clause in s. 5.05 is not as comprehensive and should not act as an override to the covenant to insure or take priority over it and the general rule precluding the right to subrogate.

[32] Thirdly, 841 only leased a small percentage of the landlord’s property where the tenant in Lee-Mar occupied the entire premises. The repair clause covers only the unit being leased and not the other parts of the premises. Simply put, 841 has no insurable interest beyond its own unit. See 1044589 Ontario Inc. v. AB Autorama Ltd., 2009 ONCA 654, 98 O.R. (3d) 263, at paras. 28-29.

[33] Lastly, the tenant in Lee-Mar was required to take out insurance for the full replacement cost of the premises. The lease in question requires the landlord, in accordance with s. 7.02, to insure the building for at least $10 million, yet 841 is only required, in accordance with s. 7.04, to acquire coverage for $5 million.

[34] The language in s. 7.02 referring to the tenant’s negligence does not create a right of subrogation for the insurer. Rather, given the inability of 841 to claim protection under the lease from a third party claim, the language refers to liability of third parties. See Alberta Importers and Distributors (1993), Inc. v. Phoenix Marble Ltd., 2008 ABCA 177, 88 Alta. L.R. (4th) 225, at para. 15. Put another way, the tenant’s obligation to acquire liability insurance does not shift liability of damage by fire from the landlord to the tenant. For example, if the tenant negligently injures a third party, the tenant’s insurance stands to indemnify the landlord against such claims relating to joint and several liability.

[35] The language of the lease does not clearly and expressly reflect the 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.

Conclusion

[36] The covenant by the landlord to obtain insurance against damages to the premises by fire is sufficient to bar the insurer from exercising any subrogation rights against 841. To do so would in essence require the tenant to pay the premiums to the insurer for the landlord’s coverage and to then pay for the loss. This is not what is intended. There would be no benefit to the tenant from this coverage if the covenant did not apply. Ultimately, the landlord’s covenant to insure is for the benefit of the tenant.

[37] For the above reasons, I answer the special case question in the affirmative with a “yes”, and accordingly bar the claim. The parties agree that such determination is dispositive and leads to a dismissal of the action.

Costs

[38] In the event the parties cannot agree, I will receive written submissions on costs not to exceed five pages (exclusive of offers to settle and Bills of Costs) from the defendants within 30 days and from the plaintiff within 20 days thereafter.

“Justice M. A. Garson” Justice M. A. Garson Date: July 5, 2017