[1]            This is an application brought pursuant to Rule 33 for a declaration that the plaintiff, North Newton Warehouses Ltd., (“North”) is precluded by the terms of the lease dated April 15, 1997 (the “Lease”) between the plaintiff and the defendant, Alliance Woodcraft Manufacturing Inc. (“Alliance”), from advancing its claim and for an order dismissing the plaintiff’s claim.

[2]            The Lease was an agreement between North as landlord and Alliance as tenant for the lease of space in a commercial warehouse complex in Surrey.  The Lease contained a provision in which North, as landlord, covenants during the term of the Lease, to take out insurance against all risks of physical loss or damages to the building.

[3]            On August 20, 2001, during Alliance’s tenancy, a fire occurred in the warehouse.  This action is a subrogated claim brought by North’s insurer in its name against Alliance for damages arising out of the fire.

[4]            Alliance submits that by virtue of the landlord’s covenant to insure, North has assumed the risk of loss or damage caused by the peril insured against, and therefore since this loss was covered by the applicable insurance, the claim must be dismissed.

[5]            Certain basic propositions are well established in the jurisprudence:

(a)   the issue of whether a subrogated action between a landlord and tenant is maintainable in the event of a fire loss arising from the tenant’s negligence is to be determined on the basis of the terms of the lease; see Agnew-Surpass Shoe Stores Ltd. v. Cummer-Yonge Investments Ltd., [1976] 2 S.C.R. 221, (1975), 55 D.L.R. (3d) 676;

(b)   the issue is to be determined as a matter of contract law on the basis of the provisions of the lease read as a whole; see Agnew-Surpass, supra, at 231 per Laskin C.J.C;

(c)   the position of the subrogated insurer against the tenant would be no better than that of the landlord; see United States of America v. Bulley et al. (1991), 55 B.C.L.R. (2d) 212 (C.A.);

(d)   the exception of fire in the repairing covenant does not exculpate a tenant from liability for fire caused by its negligence or that of a person for whose liability it is vicariously liable; see T. Eaton Co. v. Smith, [1978] 2 S.C.R. 749, (1977), 92 D.L.R.(3d) 425;

(e)   where the landlord insures without giving a covenant to that effect in the lease, the tenant will be liable for fire resulting from negligence; see Eaton, supra;

(f)   where the landlord covenants to obtain insurance against damage to the premises by fire, the landlord cannot sue the tenant for loss by fire caused by the tenant’s negligence because, where by contractual undertaking the landlord has assumed the risk of the loss caused by the peril to be insured against.  This is so notwithstanding a covenant by the tenant to repair; see T. Eaton, supra, Madison Developments Limited v. Plan Electric Co. (1998) 36 OR (3d) 80 (CA), Orange Julius et al v. Surrey et al (2000), 79 B.C.L.R. (3d) 199, 467;

(g)   a covenant given by the landlord to pay for insurance is not a covenant to insure in such a manner as to protect the tenant from liability for fire loss; see Ruge v. Kennedy (1991), 6 C.C.L.I. (2d) 156 (B.C.S.C.); Leung v. Takatsu, [1992] 3 W.W.R. 129 (B.C.C.A.); Perlitz v. Nan (1997), 51 B.C.L.R. (3d) 130 (S.C.).

[6]            In the case at bar the Lease contains Clause 8.3(a), a covenant given by the Landlord to insure, which provides as follows:

(a)   the Landlord shall, during the Term and any renewable thereof, take out and maintain in full force and effect insurance against all risks of physical loss or damage to the Building, and such fixtures and improvements as the Landlord shall determine, including the perils of flood and earthquake and including gross rental value insurance, in amounts equal to the full insurable value thereof calculated on a replacement cost basis, and subject to such deductibles as the Landlord may reasonably determine.  Provided however that the full insurable value shall not include, and the insurance shall not cover, any property of the Tenant, whether owned by the Tenant or held by it in any capacity, nor Leasehold Improvements nor any other property of whatsoever kind and description located at the Premises whether made or installed by or on behalf of the Tenant.  The Landlord shall, upon 30 days’ written notice from the Tenant, advise the Tenant of the amount of the deductible referred to in his subclause.

[7]            Counsel submits on behalf of Alliance that, pursuant to T. Eaton, supra, the covenant to insure has the effect of allocating the risk of damage to the building to the landlord’s insurance and consequently the action cannot be maintained.  Counsel submits that, as in Eaton, the covenant would be empty if the tenant did not thereby receive protection against liability for fires arising from the tenant’s negligence.

[8]            In response, counsel for North submits that when read as a whole, the terms of the Lease reflect the intention, notwithstanding the landlord’s covenant to insure, to allocate the risk of fire loss caused by the negligence of the tenant to the tenant, see Lee-Mar Developments Ltd. v. Monto Industries Ltd. (2000), 18 C.C.L.I. (3d) 224, affirmed (2001), 146 O.A.C. 360 (Ont. C.A.).

[9]            It is submitted that the following key provisions of the lease reflect this intention.

[10]        Clause 8.3, the landlord’s covenant to insure, contains the following Clause which counsel submits is found in none of the cases relied upon by the defence.  This Clause, it is submitted, evidences a clear intention that the tenant will not benefit from the landlord’s insurance.  Clause 8.3(d) provides:

Notwithstanding any contribution by the Tenant to any Insurance Costs as provided for herein, no insurable interest shall be conferred upon the Tenant under policies carried by the Landlord.

[11]        Clause 8.1 deals with insurance which the tenant covenants to take out and maintain.  This includes in Clause 8.1(a)(iii) comprehensive bodily injury and property damage liability insurance, and in Clause 8.1(a)(iv) tenant’s all-risks liability insurance in an amount not less than the replacement costs of the Premises.  Counsel submits that the provision of such coverage anticipates that if the tenant were to be negligent, it would be sued.

[12]        The clauses relating to the tenant’s obligation to insure are modified by Clause 8.1(b) which provides in part:

(b)   All policies of insurance referred to in this paragraph shall include the following provisions:

(ii)  subject to subclause 10.1(b), all property damage policies written on behalf of the Tenant shall contain a waiver of any subrogation rights which the Tenant’s insurers may have against the Landlord and against those for whom the Landlord is, in law, responsible, whether any insured loss or damage is caused by the act, omission, or negligence of the Landlord, or by those for whose acts the Landlord is, in law, responsible, or otherwise;

(iii) all policies of liability insurance shall include the Landlord and any persons, firms, or corporations affiliated with the Landlord and designated by the Landlord as additional insureds and shall provide that each person, firm, or corporation insured under such policies shall be insured in the same manner and to the same extent as if separate policies had been issued to each; and

[13]        Counsel submits that these clauses directly address the issues of the waiver of subrogation and the inclusion of the landlord as an insured under the policy.  It is noteworthy in counsel’s submission that this language is absent from Clause 8.3, dealing with the landlord’s covenant to insure.  The difference between the clauses reflects an intention that there be a different result with no waiver of subrogation in favour of the tenant, and the tenant not taking the benefit of the landlord’s insurance.

[14]        Clause 8.2 requires the tenant to indemnify the landlord from all loss and damage the landlord may sustain arising out of any act or omission of the tenant or those for whom the tenant is responsible at law.  Counsel submits that this clause is inconsistent with an intention that the tenant will benefit the landlord’s insurance for damage to the property.

[15]        Clause 10 deals with damage to the property.  Clause 10.1(b) provides that the tenant will repair, at its expense, all damage caused by its negligence.  It states:

(b)   Except as provided in subclause 10.1(c), if the Premises are damaged by fire or other casualty not caused by the negligence of the Tenant or those for whom it is responsible in law, and the damage is covered by insurance held by the Landlord under this Lease, then the damage to the Premises shall be repaired by the Landlord at its expense provided that the Tenant shall, to the limits of insurance it ought to have received under the terms of this Lease, be responsible for any costs in excess of insurance proceeds received.  The Tenant shall, at its expense, repair all Leasehold Improvements and any installations, alternations, additions, partitions, improvements, and fixtures made by or on behalf of the Tenant and all damage caused by its negligence or the negligence of those for whom it is responsible in law.  At the option of the Landlord, such repairs shall be performed by the Landlord at the expense of the Tenant if the Landlord considers that this would be more efficient and cost-effective.  All repairs which the Landlord is required to make hereunder shall be made with due diligence, provided that the Landlord shall not be liable to the Tenant for any loss or damage suffered by the Tenant as a result of any delay which may arise by reason of adjustment of insurance on the part of the Landlord or on account of the circumstances described in clause 16.7.

[16]        In short, counsel submits that the terms of the Lease, read as a whole, reflect the intention that the Landlord is entitled to recover from the tenant or its insurer in the event of the tenant’s negligence causing a loss.  The content of the covenant to insure is that the landlord’s first party insurance will restore the building to operation which is of benefit to the tenant.

[17]        I have concluded that the covenant to insure, in the context of the Lease read as a whole, does not constitute a bar to the claim.  The terms of the Lease, as outlined above, in my view reflect an intention that the Landlord will be entitled to recover from the tenant or its insurer in the event of loss caused by the tenant’s negligence.

[18]        With respect to the covenant to insure, it is clear that the matter is one of contract, not insurance, law.  In none of the cases relied upon by the defendant did there appear to be provisions such as clauses 8.3(d), 8.1(a)(iii) and (iv),8.2 and 10.1(b).  Effect must be given to these clauses.  Their collective effect is to modify what would otherwise be the effect of the covenant to insure standing alone or with a covenant to repair.

[19]        Accordingly, the defendant’s application is dismissed.

“C. Ross, J.”
The Honourable Madam Justice C. Ross