1044589 Ontario Inc. v. AB Autorama Ltd., 2009 ONCA 654

1044589 Ontario Inc. carrying on business as Nantucket Business Centre v. AB Autorama Ltd. [Indexed as: 1044589 Ontario Inc. v. AB Autorama Ltd.]

98 O.R. (3d) 263

Court of Appeal for Ontario,

Laskin, Simmons and Juriansz JJ.A.

September 16, 2009

Landlord and tenant -- Interpretation of lease -- Allocation of risk -- Offer to Lease requiring tenant to pay all costs in respect of insurance -- That obligation having effect of allocating risk of fire loss to landlord -- Landlord not entitled to proceed with negligence action against tenant for damages for fire which started on tenant's premises.

The defendant leased a unit in the plaintiff's strip mall and used it for an automobile repair shop. After a fire which started in the defendant's unit caused property damage and interruption of business, the plaintiff sued the defendant in negligence. The parties brought a motion by a special case for the court's opinion on the question whether the plaintiff or its insurer was precluded from maintaining the claim. The motion judge found that, under the terms of the Offer to Lease between the parties which, in the absence of a formal lease, governed their rights and obligations, the defendant assumed the risk for any losses caused by the fire in its unit and that the plaintiff's action could proceed. The defendant appealed.

Held, the appeal should be allowed.

The Offer to Lease contained a covenant requiring the defendant to pay "all costs in respect of . . . Insurance". If the plaintiff's negligence claim were permitted to proceed, the defendant would receive no benefit for its contribution to the cost of fire insurance. The defendant could be deprived of that benefit only if the Offer to Settle expressly said so. It did not. Thus, the defendant's obligation under the Offer to Lease to contribute to the cost of fire insurance had the effect of allocating the risk of fire loss to the landlord. [page264]

APPEAL from the order of Mesbur J., [2008] O.J. No. 3066, 169 A.C.W.S. (3d) 650 (S.C.J.) on a motion for the determination of a question of law.

Cases referred to Ross Southward Tire Ltd. v. Pyrotech Products Ltd., 1975 CanLII 25 (SCC), [1976] 2 S.C.R. 35, [1975] S.C.J. No. 62, 57 D.L.R. (3d) 248, 5 N.R. 541, [1975] I.L.R. Â1-691 at 1235, apld Lee-Mar Developments Ltd. v. Monto Industries Ltd., 2001 CanLII 32759 (ON CA), [2001] O.J. No. 987, 146 O.A.C. 360, [2002] I.L.R. I-4066, 107 A.C.W.S. (3d) 487 (C.A.), affg 2000 CanLII 50978 (ON SC), [2000] O.J. No. 1332, [2000] O.T.C. 250, 18 C.C.L.I. (3d) 224, [2000] I.L.R. I-3853, 32 R.P.R. (3d) 83, 96 A.C.W.S. (3d) 305 (S.C.J.), consd Other cases referred to Alberta Importers and Distributors (1993) Inc. v. Phoenix Marble Ltd., [2008] A.J. No. 510, 2008 ABCA 177, 88 Alta. L.R. (4th) 225, 67 R.P.R. (4th) 17, 432 A.R. 173, [2008] 7 W.W.R. 102, 62 C.C.L.I. (4th) 175, 167 A.C.W.S. (3d) 790, affg [2006] A.J. No. 1514, 2006 ABQB 854, [2007] 2 W.W.R. 747, 68 Alta. L.R. (4th) 156, 410 A.R. 78, 43 C.C.L.I. (4th) 208, [2007] I.L.R. I-4571, 49 R.P.R. (4th) 217; Cummer-Yonge Investments Ltd. v. Agnew-Surpass Shoe Stores Ltd., 1975 CanLII 26 (SCC), [1976] 2 S.C.R. 221, [1975] S.C.J. No. 74, 55 D.L.R. (3d) 676, 4 N.R. 547, [1975] I.L.R. Â1-675 at 1171; T. Eaton Co. v. Smith, 1977 CanLII 39 (SCC), [1978] 2 S.C.R. 749, [1977] S.C.J. No. 125, 92 D.L.R. (3d) 425, 15 N.R. 315, [1977] I.L.R. Â1-899 at 742, [1977] 1 A.C.W.S. 873; Tony and Jim's Holdings Ltd. v. Silva (1999), 1999 CanLII 969 (ON CA), 43 O.R. (3d) 633, [1999] O.J. No. 705, 170 D.L.R. (4th) 193, 118 O.A.C. 236, 11 C.C.L.I. (3d) 117, [1999] I.L.R. I-3669, 23 R.P.R. (3d) 1, 86 A.C.W.S. (3d) 786 (C.A.) Rules and regulations referred to Rules of Civil Procedure, R.R.O. 1990, Reg. 194, Rule 22

Steven Stieber, for appellant. William S. Chalmers, for respondent.

The judgment of the court was delivered by

LASKIN J.A.: -- Overview

[1] The respondent, Nantucket Business Centre (the "Landlord"), owns a building in a commercial strip mall. The appellant, AB Autorama Ltd. (the "Tenant"), leases one of the units in the building for an automobile repair shop. In February 2005, a fire started in the Tenant's unit. The fire caused damage to the building and its contents, interruption of business and a loss of profits. In February 2007, the Landlord sued the Tenant in negligence for these damages.

[2] The parties then brought a motion by a special case for the court's opinion on the question whether the Landlord or its insurer was precluded from maintaining its claim for damages. To answer this question, Mesbur J. had to decide which party, [page265] the Landlord or the Tenant, assumed the risk of loss caused by fire. Ordinarily a Tenant is responsible for damages caused by its own negligence unless the terms of the lease show that the parties intended to transfer the risk of loss to the Landlord. The motion judge concluded that under the terms of the Offer to Lease between the parties, the Tenant assumed the risk for any losses caused by the fire in its unit. Accordingly, the Landlord's action could proceed.

[3] The Tenant appeals on two grounds: it submits that the motion judge misinterpreted the Supreme Court of Canada's jurisprudence on this question; and it submits that the motion judge misinterpreted the terms of the Offer to Lease.

[4] I agree with both submissions. I would allow the appeal because, in my view, under the terms of the Offer to Lease, the Landlord assumed the risk of fire loss. Accordingly, neither it nor its subrogated insurer can maintain its claim against the Tenant.

B. Backgound Facts (1) The special case

[5] The parties brought their motion under Rule 22 of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194 on an agreed statement of facts and asked the court to give its opinion on the following question of law:

Given the Agreed Statement of Facts, including the provisions of the Offer to Lease, has the Defendant established, as pleaded in its Statement of Defence, that the Plaintiff is precluded from maintaining its claim, subrogated or otherwise, in this action for the damages it alleged[ly] sustained in a fire on February 9th 2005, at the premises it owned?

[6] The question refers to a subrogated claim because, although not expressly admitted, the action was undoubtedly started by the Landlord's subrogated insurer. The respondent did not assert otherwise. Of course, the Landlord's insurer in advancing a subrogated claim against the Tenant stands in the same position as the Landlord. It has only the rights given by the Offer to Lease.

(2) The Offer to Lease

[7] The parties signed an Offer to Lease; they did not sign a formal lease. However, both parties agree that the Offer to Lease governs their rights and obligations.

[8] As this appeal depends on the terms of the Offer to Lease, I will set out its salient terms. Four terms figured prominently in the parties' arguments: [page266] -- The pivotal term is para. 1, which stipulates that the tenant shall pay its proportionate share of the operating costs of the building, including all costs in respect of, among other things, "Insurance":

It is understood and agreed that:

1. It is the intention of both parties that the Lease to be prepared shall be an absolutely net Lease and, therefore, will provide that the Tenant shall pay all costs in respect of maintenance, repair and replacement of the Premises, Realty Taxes, Insurance, Heating, Hydro, Water and Utilities of all kinds, any and all applicable taxes existing now and in the future, as well as the Proportionate Share (defined in the Lease) of Realty Taxes, and all costs incurred in the operation, maintenance, repair, replacement, management and insurance of the project in which the Premises are located.

Although the Tenant is required to contribute to the costs of insurance, the Offer to Lease does not contain a corresponding covenant of the Landlord to obtain insurance against, for example, fire loss. The absence of this covenant was important to the motion judge's decision. -- Schedule A to the Offer to Lease contains a clause requiring the Tenant to maintain commercial liability insurance "including fire", in the amount of at least $2 million:

Tenant shall maintain commercial liability (including fire, premises, liability) Insurance in an amount not less than two (2) million dollars, Tenant shall hold the Landlord and his representatives harmless in any and all action against the Landlord. Landlord shall be a named insured under the Tenant's policy. Tenant shall provide a certificate of insurance to the Landlord showing the Landlord as insured. -- Schedule B to the Offer to Lease contains a clause obligating the Tenant to conduct its business in a good and lawful manner and to be responsible for any necessary repairs to its unit:

The Tenant shall conduct its business in a good and lawful manner and understands the rules and regulations of the building/property; namely operating his business in a safe and clean manner with regard to the interior as well as the exterior of his unit. In the event the Tenant fails to meet his obligations and maintain a proper and orderly operation as determined by the property manager, then the Landlord's representative shall undertake to do the required work(s) and this shall be added to the rent(s)/additional rent and be due and payable immediately. -- The Offer to Lease also contains a "whole agreement" clause, excluding any collateral agreements or representations:

3. The Tenant acknowledges there are no agreements, representations, warranties or conditions related to the Premises or the subject matter of this offer (express, implied, collateral or otherwise) except as are contained in this Offer. [page267]

(3) The tenant's negligence

[9] In the agreed statement of facts, the Tenant admits that the fire took place in its unit and occurred while its employees were working on or repairing one or more automobiles. The Tenant does not admit that its negligence caused the fire, and in its statement of defence specifically denies that it was negligent. However, for the purpose of deciding which party assumed the risk of loss, the motion judge assumed that the losses were caused by the Tenant's negligence. I make the same assumption.

C. Discussion

[10] The motion judge's conclusions rest on three holdings, each of which, in my respectful view, is in error.

(1) The Supreme Court of Canada's decision in Ross is dispositive of this appeal

[11] The main holding with which I take issue is found at paras. 7 and 8 of the motion judge's reason, where she refers to the so-called "trilogy" -- the three Supreme Court of Canada cases from the 1970s that canvassed the question of allocating risk of loss under a lease: Cummer-Yonge Investments Ltd. v. Agnew-Surpass Shoe Stores Ltd., 1975 CanLII 26 (SCC), [1976] 2 S.C.R. 221, [1975] S.C.J. No. 74; Ross Southward Tire Ltd. v. Pyrotech Products Ltd., 1975 CanLII 25 (SCC), [1976] 2 S.C.R. 35, [1975] S.C.J. No. 62; and T. Eaton Co. v. Smith, 1977 CanLII 39 (SCC), [1978] 2 S.C.R. 749, [1977] S.C.J. No. 125. The motion judge was of the opinion that in each of these cases, unlike the present case, the landlord covenanted to insure the property against fire loss. In her words [at paras. 7-8]:

The plaintiff suggests that the current state of the law preserves the general rule that a tenant is responsible for damage caused by its own negligence and is not immune from a landlord's suit, unless there is clear language in the lease to the contrary. It says there is no such clear language here, and thus the plaintiff's suit may continue against the tenant.

What emerges from all the case law is that the result will turn on the express wording of the lease in question. 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. (Emphasis added)

[12] The problem with the motion judge's analysis is that in one of the Supreme Court of Canada cases -- the Ross case -- the lease did not contain a covenant requiring the landlord to obtain insurance against fire loss. Yet the Supreme Court of [page268] Canada held, at pp. 39-41 S.C.R., that because the lease obligated the tenant to pay for insurance, the risk of loss by fire passed to the landlord and precluded a subrogated claim for fire loss by the landlord's insurer:

Counsel for the appellant 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. . . . . .

In my opinion, the landlord's insurer has no basis for asserting a subrogated claim in the present case.

[13] In substance, the Ross case is identical to the present case, and is dispositive of this appeal. The lease in Ross stipulated [at p. 37 S.C.R.] that "the lessee shall pay all realty taxes including local improvements and school taxes, electric power and water rates and insurance rates immediately when due" (emphasis added). The Offer to Lease in the present case stipulates that ". . . the Tenant shall pay all costs in respect of . . . Insurance". In Ross, the lessee's covenant did not specify fire insurance, but the Supreme Court of Canada had no difficulty in concluding that the obligation to pay all insurance rates included fire insurance. Similarly, although the Tenant's covenant in the Offer to Lease to contribute to the costs of insurance does not specify fire insurance, I have no difficulty in concluding that it includes the costs of fire insurance.

[14] The rationale for the holding in Ross is simply that because the lessee paid for insurance, it gets the benefit of insurance coverage. To permit the Landlord or the Landlord's insurer to then sue the lessee for fire loss caused by its negligence would deprive the lessee of that benefit.

[15] Similarly, if the Landlord's negligence claim were permitted to proceed in this case, the Tenant would receive no benefit for its contribution to the cost of fire insurance. The Tenant could be deprived of that benefit only if the Offer to Lease expressly said so. There was no such provision in the lease in Ross and no such provision in this Offer to Lease: [page269] see Alberta Importers and Distributors (1993) Inc. v. Phoenix Marble Ltd., 2006 ABQB 854, [2006] A.J. No. 1514, 410 A.R. 78 (Q.B.), affd 2008 ABCA 177, [2008] A.J. No. 510, 432 A.R. 173 (C.A.).

[16] Thus, the Tenant's obligation under para. 1 of the Offer to Lease to contribute to the cost of insurance has the effect of allocating the risk of fire loss to the Landlord. This result makes commercial sense. Although the Offer to Lease does not contain an express covenant requiring the Landlord to obtain fire insurance, this Landlord, like any landlord with a similar lease, would, as a practical matter, obtain insurance coverage. Even if the whole agreement clause excludes an implied covenant to do so, it would defy commercial reality for the Landlord not to insure its property. In this case as in Ross, the Landlord did obtain insurance coverage: see, also, Tony and Jim's Holdings Ltd. v. Silva (1999), 1999 CanLII 969 (ON CA), 43 O.R. (3d) 633, [1999] O.J. No. 705 (C.A.).

[17] On the basis of the Ross decision alone, I would allow this appeal and reverse the conclusion of the motion judge.

(2) The offer to lease differs from the lease in Lee-Mar Developments Ltd.

[18] In Lee-Mar Developments Ltd. v. Monto Industries Ltd., 2000 CanLII 50978 (ON SC), [2000] O.J. No. 1332, 18 C.C.L.I. (3d) 224 (S.C.J.), affd 2001 CanLII 32759 (ON CA), [2001] O.J. No. 987, 146 O.A.C. 360 (C.A.) Chapnik J. held that the terms of a lease between the parties allowed the landlord's insurer to bring a subrogated claim against the tenant for damages caused by a fire in the tenant's premises. This court dismissed an appeal from her decision. In a short endorsement, the panel concluded that she did not err in her interpretation of the lease.

[19] The motion judge in this case relied on Lee-Mar. She held that the lease in Lee-Mar and the Offer to Lease were similar. Accordingly, the reasoning in Lee-Mar applied in this case. I take a different view.

[20] I acknowledge that there are similarities. Under both the lease in Lee-Mar and the Offer to Lease, the tenant was obliged to pay for or contribute to the cost of insurance; neither the lease in Lee-Mar nor the Offer to Lease expressly obligated the landlord to insure its property; and both the lease in Lee-Mar and the Offer to Lease contained a whole agreement clause excluding any collateral obligations.

[21] However, there is an important factual difference between the lease in Lee-Mar and the Offer to Lease. Under the lease in Lee-Mar, the tenant leased the entire building. Under the Offer to Lease, the Tenant leased only one of the units in the building. [page270]

[22] This factual difference likely partly explains why the lease in Lee-Mar contained two broad covenants that are not found in the Offer to Lease. These two covenants were instrumental to Chapnik J.'s decision. The first covenant was a broadly worded provision governing repairs where the tenant was at fault. This provision obligated the tenant to pay for any damages or repairs to the building caused by its negligence or carelessness:

Notwithstanding any other terms, covenants and conditions contained in this Lease including, without limitation, the Landlord's obligations under "utilities & maintenance", and Tenant's obligation in "insurance" if the Land, Building or any part thereof including, without limitation, any equipment, machinery, facilities or improvements contained therein or made thereof, or the roof or outside walls of the Building or any other structural portions thereof, require repair or become damaged or destroyed through the negligence, carelessness or misuse of the Tenant or through it in any way stopping up or damage the hearing apparatus, water pipes, drainage pipes or other equipment or facilities or parts of the Building or Land, the costs of resulting repairs, replacements or alterations, shall be borne by the Tenant, who shall pay the same to the Landlord forthwith upon presentation of an account of such expenses incurred by the Landlord.

[23] The second covenant was a provision that required the tenant to pay for and maintain in its name and in the name of the landlord insurance against property damage and tenant's legal liability insurance "for the full replacement cost of the Premises".

[24] On the basis of these two covenants, especially the repair covenant, Chapnik J. concluded that the tenant assumed the risk of loss from its negligence. She wrote, at para. 13 of her reasons:

In my view, these two clauses are clear and unambiguous; and they reflect the intention of the parties that the tenant assume the risk for any losses caused by the tenant's negligence. Indeed, the clause on repairs expressly takes priority over other provisions in the lease and calls upon the tenant to pay the landlord for damages to the premises caused "though the negligence, carelessness or misuse" of the tenant.

[25] The motion judge in this case held that the clause in Schedule B of the Offer to Lease, requiring the Tenant to conduct its business in a good and lawful manner and to be responsible for any necessary repairs, was sufficiently similar to the repair provision in the Lee-Mar lease "to bring it squarely within the reasoning of Lee-Mar". I do not agree.

[26] As I have said, the repair provision in the Lee-Mar lease is comprehensive in scope. The tenant must pay the cost of any damage or repair to any part of the building caused by [page271] its negligence. This obligation is coupled with the tenant's obligation to maintain insurance coverage against property damage to the building.

[27] By contrast, the clause in the Offer to Lease is narrow. It merely obliges the Tenant to be responsible for the repair and upkeep of its own unit. And, as Charron J.A. observed, at p. 637 O.R., in Tony and Jim's Holdings Ltd. v. Silva, where a tenant covenants to pay for insurance, the risk of loss by fire passes to the landlord, despite the tenant's general covenant to repair.

[28] Moreover, the Offer to Lease does not contain a covenant requiring the Tenant to insure the building against property damage. Nor could it. As the Tenant leases only one of the units in the building, it has no insurable interest in the rest of the building.

[29] Because of these significant difference between the lease in Lee-Mar and the Offer to Lease, the reasoning and decision in Lee-Mar provide no support for the Landlord's position.

(3) The clause requiring the Tenant to maintain commercial liability insurance does not support the Landlord's position

[30] The motion judge held that the clause in Schedule A of the Offer to Lease requiring the Tenant to maintain commercial liability (including fire and premises) insurance "lends weight to the landlord's position". I do not agree with that holding. This clause obligates the Tenant to obtain third-party liability insurance. So, if a third party sustains damage -- including damage from fire -- because of the Tenant's negligence, the Tenant bears the risk of that loss. This has nothing to do with the issue on appeal: who bears the risk of first party property damage. The Alberta Court of Appeal explained this distinction in Alberta Importers and Distributors, at para. 15:

Second, the Appellant misapprehends the nature and purpose of general liability insurance as opposed to property insurance. The former covers claims by third parties and benefits the landlord. If the tenant's negligence injures a third party, the tenant's liability insurance indemnifies the landlord against such claims which the property insurance would not cover. The policy also protects the landlord against claims for joint and several liability and protects against an insolvent tenant. The tenant's obligation to acquire liability insurance is, in our opinion, compatible with the landlord's express and implied covenant to acquire property insurance and does not shift liability for damage by fire from the landlord to the tenant.

[31] Therefore, in my view, the Tenant's covenant to maintain commercial liability insurance lends no weight to the Landlord's position. [page272]

D. Conclusion

[32] The risk of loss by fire passed to the Landlord under the terms of the Offer to Lease because of the covenant requiring the Tenant to contribute to the cost of insurance. Accordingly, neither the Landlord nor its insurer can proceed with its negligence action against the Tenant.

[33] I would allow the appeal, set aside the order of the motion judge and in its place order that the Landlord is precluded from maintaining its claim against the Tenant. The Tenant is entitled to its costs of the motion in the amount fixed by the motion judge, $3,000 all inclusive, and the costs of the appeal in the amount agreed to by counsel, $6,000 inclusive of disbursements and GST.

Appeal allowed.