Prezzo Limited v High Point Estates Ltd

1. Background

Prezzo Ltd. had a lease of the ground floor and basement of a property which they used as a restaurant. A fire broke out in the restaurant, causing damage to the restaurant and the rest of the building. The insurance clause in the lease was unusual because the landlord was only obliged to insure the ‘Premises’ i.e. the restaurant and not the whole of the building. The landlord made a claim on its buildings insurance policy. After the landlord’s insurer paid the claim, the landlord’s insurance company then wanted to step into the shoes of the landlord and make a claim against Prezzo for the damage caused by the tenant’s negligence in starting the fire. This “stepping into the shoes of the landlord” is the concept of subrogation. However, in this case, this result was probably not the outcome the landlord and tenant intended when they negotiated the lease.

2. Subrogation

The common law rule on subrogation is that, when an insurer has paid money out to an insured party under an insurance policy, the principle of subrogation enables the insurer to recoup money from a third party who caused or contributed to the loss.

3. The restaurant premises

The Court in this case accepted that the principle in Mark Rowlands Ltd v Berni Inns Ltd [1986] Q.B. 211 applied in respect of the restaurant premises. That principle means that where insurance has been put in place for the benefit of both the landlord and the tenant, no claim can be brought against the tenant. In this case, the landlord’s insurance for the restaurant was for the benefit of both the landlord and the tenant and therefore, the landlord could not claim against Prezzo for the damage caused to the restaurant. 

4. The remainder of the building

The landlord also wanted to claim against Prezzo for the damage the fire had caused to rest of the building. The question was – could the principle in Berni Inns also prevent the landlord claiming against Prezzo for the damage to the rest of the building?

5. Decision

The landlord was only obliged to insure on behalf of both itself and Prezzo for the ‘Premises’ and not for the whole of the building. Therefore, the Berni Inns principle only applied to the tenant’s premises as defined in the lease and Prezzo was only protected for their restaurant and not for the damage caused to the rest of the building. This meant that the insurer was able to exercise a right of subrogation against Prezzo in respect of the damage caused to the remainder of the building, even though Prezzo’s lease limited the landlord’s insurance obligations to the restaurant only.

6. Practical considerations 

This result potentially provides an insurer with double recovery:

  1.  On premium payments from the landlord (which, in part, were paid by the tenant)
  2. On its subrogated claim against the tenant for the damage the tenant caused. A waiver of subrogation clause by the landlord in the lease would prevent this unintended result by preventing the landlord’s insurance company from claiming against the tenant.

If the tenant is taking a lease of part of a building and the lease doesn’t contain a waiver of subrogation clause the tenant should check carefully to see what the landlord is required to insure against – is it just part of the building or the building as a whole?  This case has left tenants vulnerable to claims from insurers for loss and damage caused to the rest of the landlord’s building depending on what the landlord is obliged to insure against in their lease.