We were recently involved in a situation where the landlord's insurer may be denied the right to subrogate against the tenant. We consider this issue important for professionals involved in the commercial real estate industry, particularly commercial landlords.

The area of law relating to the rights between landlords and tenants as to the obligations to repair and insure against damage caused by a tenant is well established by three cases heard by the Supreme Court of Canada1. These cases, often referred to as the "Trilogy," have been followed by Alberta courts.

The principles prescribed by the Supreme Court in the Trilogy cases are:

  • Where the tenant pays a portion of the premium for the landlord's insurance, the landlord bears the risk of loss from the tenant's negligence;
  • Where the tenant pays for the landlord's insurance coverage, it should get the benefit of this insurance coverage;
  • A landlord's covenant to insure the premises is a contractual benefit for the tenant and the tenant would receive no benefit if the landlord (or its insurer) could sue the tenant for damages due to its negligence.

While these legal principles are well established, the issues continue to be litigated across Canada. There are varying lines of reasoning among the Canadian jurisdictions.

In Manitoba, the Court of Appeal appeared inclined to interpret commercial leases with a different result from that prescribed by the Supreme Court principles in the Trilogy cases. In Sooter Studios Ltd. v. 74963 Manitoba Ltd. et al.2, the court placed emphasis on the presence of express indemnification and save harmless clauses. The court also emphasized the absence of an express covenant to insure in the lease.3

Courts in Saskatchewan4, British Columbia5 and Alberta appear inclined to follow the principles articulated by the Supreme Court in the Trilogy cases. The leading case in Alberta on this issue is the Court of Appeal's decision in Alberta Importers and Distributors Inc. v. Phoenix Marble Ltd.6 This case followed the principles set out in the Trilogy cases and has been followed in 20167 and 20178 by the Alberta Court of Queen's Bench. A further discussion of this can be found below with reference to the Aluminum Planet case.

In the majority of decided cases in Canada and in the absence of language in the lease in question to take the intention of the parties outside of the principles in the Trilogy cases, the landlord's insurer has been unsuccessful in pursuing a subrogated claim against the tenant, and the general principles outlined by the Supreme Court of Canada in the Trilogy cases have been upheld.

Insurers have attempted to circumvent these principles by pointing to lease covenants by tenants to indemnify the landlord or to obtain separate tenant insurance. These arguments have generally been unsuccessful. An example of this is found in Core Ventures Inc. v. Trio Chute Inc. (Aluminum Planet).9 In that case, the landlord argued it could pursue the tenant in negligence because the lease required the tenant to repair damages caused by its negligence "without set-off or deduction or benefit of any insurance proceeds received by the Lessor."10 The court rejected this argument and held that unless otherwise rebutted under the lease, the landlord assumed the risk of damage caused by fire. Given that the tenant had also paid a proportionate share of the landlord's insurance premiums, the landlord's claim was barred.

One recent example where a landlord was successful in overcoming the principles set out in the Trilogy cases is the 2018 Ontario Court of Appeal decision in Royal Host GP Inc. v. 1842259 Ontario Ltd.11 This case found the lease had created a contrary intention such that the principles set out by the Supreme Court of Canada did not apply. While the lease contained a covenant by the landlord to maintain insurance, the clause in question went on to state the following:

  • Notwithstanding the landlord's covenant contained in this Section 7.02, and 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
    • the tenant is not relieved of any liability arising from or contributed to by its acts, fault, negligence or omissions, and
    • no insurance interest is conferred upon the tenant, under any policies of insurance carried by the landlord, and
    • the tenant has no right to receive any proceeds of any policies of insurance carried by the landlord.

The Ontario Court of Appeal held that this "notwithstanding" clause in the lease demonstrated a clear intention that the tenant would not have the benefit of the landlord's insurance where the damage was caused by the tenant's negligence. This additional language in the lease was determined to be sufficient to overcome the principles prescribed by the Supreme Court of Canada in the Trilogy cases. The Ontario Court of Appeal also expressed that the Trilogy cases have not affected the fundamental principle of contractual interpretation and that it is necessary to discern the parties' intentions based on the language in the contract.

The Ontario Court of Appeal decision in Royal Host has not yet been followed in Alberta. We would like to believe this decision will be followed, but for now this issue remains undecided by the Alberta courts.

Recommendations

In light of the Supreme Court of Canada's principles set out in the Trilogy cases and the decision in Royal Host, it is critical to draft insurance provisions in a commercial lease that indicate a contrary intention to overcome the principles set forth by the Supreme Court of Canada in the Trilogy cases and subsequent cases.

The specific language expressed in the lease referenced in Royal Host or similar language would be required to create an exception to the principles set out in the Trilogy cases.

Some commercial lease forms used in Alberta do not address this issue or contain language stating the tenant's insurance is primary and the tenant is not entitled to receive any proceeds from the landlord's insurance. While this language may be persuasive, we believe language in a commercial lease that provides for the following would provide a better exception to the Trilogy principles:

  • Notwithstanding any tenant contribution to the cost of the landlord's insurance, the tenant shall not have any insurable interest in, or any right to recover any proceeds under any of the landlord's insurance policies.
  • The tenant shall not be relieved of any liability arising from or contributed to by its acts, fault, negligence or omissions.
  • The tenant's insurance shall remain primary and shall not call into contribution any other insurance available to the landlord.

Given the nature of insurance contracts, any changes to a lease form will need to be approved by the landlord's insurer.

The author wishes to thank articling student Oliver Zaman for his help in preparing this legal update.

Footnotes

1. Ross Southward Tire v Pyrotech Products, [1976] 2 SCR 35, Agnew-Surpass v Cummer-Yonge, [1976] 2 SCR 221 and T Eaton Co v Smith et al, [1978] 2 SCR 749.

2. Sooter Studios Ltd v 74963 Manitoba Ltd et al, 2006 MBCA 12.

3. Ibid at para 32.

4. Poole Properties Ltd v Stevens, 2016 SKPC 12.

5. North Newton Warehouses Ltd v Alliance Woodcraft Manufacturing Inc, 2005 BCCA 309.

6. Alberta Importers and Distributors Inc v Phoenix Marble Ltd, 2008 ABCA 177.

7. Youn v 1427062 Alberta Ltd, 2016 ABQB 606.

8. Core Ventures Inc v Trio Chute Inc (Aluminum Planet), 2017 ABQB 794.

9. Ibid.

10. Ibid at para 21.

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

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