A recent Court of Appeal case affirming an earlier Supreme Court decision, provides some interesting, and possibly surpirsing, commentary on the allocation of risk in commercial leases.
In 1044589 Ontario Inc. carrying on business as Nantucket Business Centre v AB Autorama Ltd. the Ontario Court of Appeal ruled on the liability for damages that resulted from a fire that occurred due to the tenant’s negligent use of a leased unit. The parties had negotiated an Offer to Lease, which required the tenant to maintain commercial liability insurance (including fire, premises and liability) in the amount of two million dollars.
There was a fire and there were damages. Presumably the amount of damages exceeded the two million dollar cap, or whatever amount the tenant’s insurance paid out in any event, and the landlord attempted to sue for the excess damages. The landlord was acting under the general rule that a tenant is responsible for damage caused by its own negligence.
However, the court held that under the circumstances, the obligation to carry the insurance transferred the risk of loss to the landlord. The court held that any other result would deprive the tenant of the benefit of paying the insurance premiums. The landlord was precluded from carrying on its claim against the tenant.
If you are a landlord and your standard form leases contain an insurance requirement, you should be aware that they may shifting liability for excess damages on to you. Whether the Nantucket v Autorama case will apply to your leases will depend on the context of the full lease, the percentage of the building rented, and any other covenants contained in the lease.
There are two pieces of advice that we can offer to avoid liability for any damages not covered by insurance.
□ The first is a requirement of tenants to carry insurance well in excess of what might reasonably be required in order to pay for damages. If insurance fully covers all of the losses associated with the negligent act, then it never becomes an issue. We recognize of course that insurance is expensive and that this option may not be commercially viable for most tenants.
□ The second is to ensure that the lease is drafted so as to give clear and unambiguous consideration to the question of liability for damages that result from negligence. Such drafting must give regard to the entirety of the lease (including the offer to lease), and factors such as the tenant’s liability for the whole building.
If you have any questions about this, we can review any lease you have in place or any offer to lease that you are negotiating. We can advise you of your exposure and we can suggest practical solutions. Don’t hesitate to contact us.