Tenants and Insurance – A cautionary tale

09 / 10 / 2018

In the vast majority of leases, it is routine for:

A. The Landlord to insure the Premises against a set of defined “Insured Risks” (including fire); and
B. The Landlord to be under an obligation to rebuild the Premises in the event of damage by an Insured Risk (unless the policy is vitiated due to the default of the  Tenant); and
C. The Tenant to be under an obligation to refund the insurance premium paid by the Landlord in respect of the insurance of the Premises.

You might think that it would make no difference to the position of the Tenant if the Premises were “stand-alone” or, alternatively, part of a much larger building. A recent case, however, demonstrates that there is a nasty little trap for tenants of premises which form part of a larger building and where the outcome depends upon the precise wording of the obligations of the Landlord in the lease.

A case in 1986 (Mark Rowlands Ltd v Berni Inns Ltd), which concerned “stand-alone” premises established the following:

  1. The insurance which had been placed by the Landlord in that case was for the joint benefit of the Landlord and the Tenant; and
  2. In such circumstances, the intention of the parties sensibly construed must therefore have been that in the event of damage by fire, whether due to accident or negligence, the Landlord’s loss must be recouped from the insurance moneys and that, in that event, the Landlord would have no further claim against the Tenant for damages in negligence.

A recent decision in the High Court shows that the position can be quite different where the Premises are part of a larger building. In Prezzo Limited v High
Point Estates Ltd, the Tenant negligently caused a fire which severely damaged both the Premises and also a substantial part of the building of which the Premises formed part. The position under the lease was as set out in paragraphs A, B and C at the start of this piece. The crucial point was that the obligations of the Landlord both to insure and to rebuild were restricted to the Premises and not the building of which the Premises formed part.

Applying the Mark Rowlands principles, the Landlord could not proceed against the Tenant for its negligence in respect of the damage to the Premises, but it could proceed against the Tenant for its negligence in respect of the damage to the rest of the building. The Court held that the Landlord’s contractual obligation to insure was limited to the Premises and could not be construed so as to include an obligation to insure the whole building. Of course, the Landlord did have insurance for the whole building and would recover the cost of reinstating the building from the insurer. However, in such circumstances, an insurer who pays out a claim is entitled to be subrogated to the position of the Landlord and is therefore able to sue any person who the Landlord could sue in order to recover the loss. If the Landlord cannot pursue the Tenant, then neither can the insurer. However, if the Landlord is able to recover as against the Tenant, then so is the insurer who pays out the loss.

“…there is a nasty little trap for tenants of premises which form part of a larger building and where the outcome depends upon the precise wording of the obligations of the Landlord in the lease”

(Imagine the possible liability for a Tenant in such circumstances where the Premises leased to the Tenant comprise merely one floor in an enormous tower block, or one unit in a large shopping centre. The potential liability could be terminal for the Tenant, to say the least!)

Of course, it all comes down to the wording of the insurance arrangements in the lease. In Prezzo, had the obligation of the Landlord been to insure the whole building of which the Premises formed part together with a commensurate obligation to reinstate, the Landlord would not have been able to recover its loss against the Tenant and, accordingly, neither would the insurer.

One might think in any event that, as a matter of practicality, a Tenant ought to ensure that the obligation of the Landlord should be to insure the whole building and not just the premises leased to it. Suppose the lease to the Tenant of the top floor of a tall building has an insurance and rebuilding obligation limited to the Premises. If the whole building burns down, it is not unreasonable to suppose that an obligation to reinstate the top floor must include an implied obligation to rebuild the rest of the building since the top floor cannot be rebuilt in mid-air without the rest of the building. However, it is always preferable to ensure that by having an obligation to insure the whole building, the Landlord has the wherewithal to do so.

The takeaway from this is that it is important that the Landlord should be under an obligation to insure the whole building. In an ideal world, those acting for Tenants should seek to include a waiver of the right to proceed against the Tenant for negligence in respect of risks covered under the building insurance policy together with an obligation to procure a subrogation waiver on the part of the insurer in the insurance policy itself (the latter is more common than the former).