Subrogated Claim not Barred by Lease Provision

Designer Collection Sales Inc. v. 161 Spadina Inc., [2012] O.J. No. 2026 (S.C.J.)

In the commercial context, it is common for lease agreements to have clauses that transfer risk from the landlord to the tenant. The Superior Court of Justice recently considered whether such a clause absolves a landlord from a property damage claim by the tenant.

In this case the plaintiff company sued its landlord after water damage occurred due to a broken pipe. The plaintiff recovered more than $600,000 under its insurance policy for the damage. The insurer then brought a subrogated claim to recover the sums it paid out.

Under the contract between the parties, the plaintiff was required to take out a liability policy. The contract contained the following provision:

The Landlord is not liable for any damage to the Tenant's property or for any injury to any person in or coming to or from the Premises, however caused, and the Tenant agrees to indemnify the Landlord against the financial consequences of any such liability. In this regard, the Tenant shall purchase and maintain public liability insurance in the amount of no less than one million dollars ($1,000,000) and shall provide proof of this insurance to the Landlord on request.

The landlord brought a motion for summary judgment arguing that the effect of the clause was to transfer the risk of damage or loss to the plaintiff, even if it was due to the landlord’s fault or neglect. The plaintiff argued that the clause was intended to relate to risks covered by public liability rather than property insurance.

Justice Duncan summarized the case law as follows:

[19] The decisions that have been rendered establish this principle: contractual language may create an overwhelming obstacle to recovery against a negligent party whether the claim is asserted directly or on a subrogated basis. An action will fail to the extent a lease expressly or by necessary implication obligates the innocent party to obtain insurance which covers the risk and claims in issue.

The Court dismissed the motion on the basis that there was insufficient evidence regarding whether the parties meant to forfeit the right to sue. Justice Duncan held that merely agreeing to obtain liability insurance did not necessarily mean the plaintiff was agreeing not to sue especially given that property insurance is not the same as liability insurance. There had to be an underlying contractual obligation in the lease that insulated the landlord from liability.