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Allocating Insured Risks Between Landlords and Tenants

A recent decision by the Ontario Court of Appeal addressed the allocation of loss risk between a tenant and a landlord in a situation where there was no formal lease.
 
The tenant in the landlord’s strip mall used it as an automobile repair shop.  A fire which started in the repair shop caused property damage and interrupted the landlord’s business, so the landlord sued the tenant for negligence.  The issue was whether the tenant or its insurer was prevented from sustaining the claim.  
 
The motions judge held that – because there was no formal lease between the landlord and tenant – the Offer to Lease governed the relationship between them.  Under this document, the tenant assumed the risk of loss for any fire in its unit.
 
The tenant appealed the judge’s ruling, and was successful.  The Offer to Lease contained a clause that said the tenant was required to pay “all costs in respect of … insurance”.  (Although it did not specify fire insurance, the court had no difficulty in concluding this type of insurance was covered).  Accordingly, the tenant’s obligation in the Offer to Lease to contribute to the cost of insurance essentially had the effect of allocating the risk of fire loss to the landlord.  To conclude otherwise meant that the tenant would have no benefit at all from its contribution to the insurance cost; such an outcome could only occur if the Offer to Lease expressly provided so in clear language.  Therefore – and in light of the tenant’s obligation pursuant to the Offer to Lease to contribute to the cost of insurance – it followed that neither the landlord nor the insurer could proceed with its negligence claim against the tenant.  The appeal was allowed.  See 1044589 Ontario Inc. v. AB Autorama Ltd. (2009 ONCA).