Landlords and tenants should always be thinking about the relationship between an obligation to insure and a lease’s indemnity clause so that the risk, should the “Premises” be damaged, is  allocated as the parties intended.

Generally, where insurance is obtained for the benefit of one party, the obligation to insure  operates as a waiver of liability in favour of the other party. However, in one recent case  Deslaurier Custom Cabinets Inc. v 1728106 Ontario Inc., 2014 ONSC 5148 (“Deslaurier”), the Ontario  Superior Court of Justice held that a tenant’s covenant to insure may be limited by express  provisions in the lease.

In Deslaurier, 1728106 Ontario Inc. (the “Landlord”) entered into a lease with Deslaurier Custom  Cabinets Inc. (the “Tenant”) to carry on the business of manufacturing and sale of custom cabinets  in Units 4, 5, 11, 12, 13, 14, and 16 of the Building, containing a rentable area of 95,090 square  feet (the “Premises”). As a condition of the lease, the Landlord was required to have John Faught  Steel Inc (“JFS”), perform structural repairs to the Premises. During this repair work, a fire  occurred resulting in the total loss of the building.

The Tenant sought recovery of damages to its property, and its business interruption losses. The  Tenant was paid approximately $10,861,885.65 by its insurer and sought to recover its remaining  alleged losses from the defendants, the Landlord and JFS, in the amount of $4,138,114.35. The Landlord brought a summary judgment motion and the Tenant brought a cross-motion  to determine who assumed the risk of damage resulting from the fire. JFS did not participate in the  summary judgment proceeding.

The issue was the interpretation of the lease, and the relationship between the Tenant’s obligation  to insure clause 8.1.1, the Landlord’s indemnification clause 8.2.1, and the effect of clause 9.3,  the relevant parts of which are set out below:

8.1.1 The Tenant must also obtain the following insurance for the Premises: ii. insurance against all risks of loss or damage to the Tenant’s property; … 8.2.1 … the Landlord further covenants to indemnify the Tenant with respect to any encumbrances on  or damage to the Premises occasioned by or arising from the act, default, negligence of the  Landlord, its officers, agents, employees, contractors, customers, invitees or licensees; …

9.3 Apart from the provisions of Section 9(1) and as otherwise specifically provided for in this  Lease, … nor shall the Tenant be entitled to claim against the Landlord for any damages, general or special,  caused by fire, water, sprinkler systems, partial or temporary failure or stoppage of services or  utilities which the Landlord is obligated to provide according to this Lease, from any cause  whatsoever. [Emphasis added]

Before determining whether the Landlord’s liability was changed by section 8.2.1 Justice Métivier,  writing for the Court, first had to decide what the parties meant by the term “Premises”. On its  face, “Premises” referred to nothing more than the rentable area leased by the Tenant. Other terms  of the lease referred to Premises in the following contexts: “…the Tenant shall: keep in good  condition the “Premises” including all alterations and additions made thereto (save and except for  wear and tear)…” and “[i]f the Tenant… desires to make any alterations or additions to the  Premises, including but not limited to… attaching equipment, and installing furnishings… the Tenant  may do so at its own expense…”. Justice Métivier acknowledged that the reference in the lease to  “Premises” seemed to indicate that the term was to be restricted to the rentable space and excluded  the Tenant’s property.

Nevertheless, Justice Métivier held that if “Premises” meant nothing more than the rentable area,  then the Landlord would be indemnifying the Tenant for something in respect of which the Tenant had  no interest. It does not appear from the decision  that the Court considered whether the Tenant’s  leasehold interest, or the market value of the leasehold interest, was an  interest the Tenant had  and which was amenable to indemnification by the Landlord. Instead, Justice Métivier held that  limiting the “Premises” to the rentable area would, in effect, render the second portion of s.  8.2.1 meaningless. The Court decided to reject an interpretation which in its opinion would render one of the lease’s terms ineffective.  In our view, the decision in Deslaurier, is an indication that the courts are willing to expand a  term’s meaning beyond the written words in the lease or its customary usage, and pursue an  interpretation that produces a “fair result” or a “sensible commercial result”.

Having expanded the interpretation of “Premises” to include the Tenant’s property, the Court then  shifted focus to decide whether the Tenant’s obligation to insure was in any way limited by the  other provisions in the lease. The Court relied on   the introductory wording in section 9.3 and  extrinsic evidence regarding leases for other units in the same building that only contained  one-way indemnification clauses to find that the parties must have specifically intended to give  the Tenant some contractual right not granted to the other tenants in the building. The Court held  that the Tenant’s covenant to insure was limited by the express provisions in the lease that required the Landlord to indemnify the Tenant  for its (or its agent’s) acts or negligence. Therefore, the Landlord was held liable for the losses  claimed by the Tenant.

In conclusion, landlords and tenants should pay particular attention to the insurance and  indemnification clauses of their  leases that allocate the risk of loss between the parties in the  event of damage and destruction. When a premises is damaged as a result of the acts or negligence  of others, your insurance and indemnity clauses are crucial to making your business whole again.  However, as demonstrated in Deslauriers, landlords and tenants must be aware that the slightest  ambiguity in either clause may provide the court with an opportunity to hold one party or another  to be responsible for so much more than that for which they bargained.