



COURT OF APPEAL FOR ONTARIO

CITATION: Royal Host GP Inc. v. 1842259 Ontario Ltd., 2018
    ONCA 467

DATE: 20180518

DOCKET: C64126

Hoy A.C.J.O., Juriansz and Miller JJ.A.

BETWEEN

Royal Host GP Inc., in its capacity as the
    general partner of the Royal Host Limited Partnership

Plaintiff (Appellant)

and

1842259 Ontario Ltd., Mao Hui Zhang, Tian Xing
    Yang and Dong Jiang

Defendants (Respondents)

Jonathan C. Lisus and Andrew J. Winton, for the appellant

Dan Rabinowitz and Sean D. McGarry, for the respondents

Heard: March 12, 2018

On appeal from the judgment of Justice Marc A. Garson of
    the Superior Court of Justice dated July 5, 2017, with reasons reported at 2017
    ONSC 3982.

Juriansz J.A.:

A.

Facts

[1]

The appellant owns a multi-story commercial
    building in which it operates a hotel. The respondents leased a portion of the
    building in which they operated a restaurant. A fire broke out in the
    respondents kitchen causing extensive damage to the building. The appellant
    was indemnified by its insurer for its losses and its insurer commenced this subrogated
    action, in the appellants name, seeking recovery of the damages suffered. The
    action alleges the fire was caused by the respondents negligence.

[2]

The respondents took the position that even if
    the fire were caused by their negligence, the terms of the lease prevented the
    appellant from bringing this action. The respondents brought a motion by way of
    special case seeking determination of the following question:

Does the lease bar the plaintiffs insurer from bringing this subrogated
    action for damages in the name of the plaintiff, as against defendants?

B.

Decision of the Motion Judge

[3]

The motion judge answered the question Yes and
    dismissed the appellants action. This conclusion was based on the motion
    judges construction of s. 7.02 of the lease. Section 7.02 provided the landlord
    shall take out and maintain fire insurance on the building and added the
    costs of the insurance to the common expenses paid by the tenants. It also stated
    that the tenant is not relieved of any liability arising from or contributed
    to by its acts, faults, negligence or omissions.

[4]

The motion judge relied on a trilogy of Supreme
    Court of Canada decisions: (i)
Agnew-Surpass v. Cummer-Yonge
, [1976] 2
    S.C.R. 221; (ii)
Ross Southward Tire v. Pyrotech Products
, [1976] 2
    S.C.R. 35; and (iii)
T. Eaton Co. v. Smith et al
.
, [1978] 2
    S.C.R. 749. Citing these cases, he said As a general rule, courts have limited
    the subrogation rights of an insurer when a landlord covenants to pay for the
    insurance and agrees to look to its own insurer for any loss.

[5]

The Supreme Court set out two principles in the
    trilogy. The first is that a landlords
covenant in a
    lease to insure the premises is a contractual benefit for the tenant, and the tenant
    would receive no benefit if the landlord could sue the tenant for the damages
    due to its negligence. The rationale for the principle is that since the
    landlord is free to insure the premises, the
inclusion
    of a covenant to insure must be for the benefit of the tenant. If the landlords
    insurer were allowed to bring subrogated claims against the tenant, the
    covenant expressly running to the benefit of the tenantwould have no subject
    matter:
T. Eaton Co
., at p. 754.

[6]

The second principle is that where the tenant
    pays for the insurance coverage, it should get the benefit of the insurance
    coverage. The logic is that the tenant having paid for the insurance should get
    the benefit of the insurance. As Laskin C. J. put it in
Pyrotech Products
, at p. 41, the tenant
    has paid for an expected benefit, as between itself and its landlord which any
    standard fire policy would reflect in providing indemnity to the landlord.

[7]

The motion judge, following the logic of the
    Supreme Court in the trilogy, reasoned at, paragraph 27, that the clause must
    be construed to benefit the tenant. He remarked, at paragraph 35, that [i]t
    would defeat the purpose of the covenant to permit the insurer to look to the tenant
    for recovery after the lease clearly required the landlord to seek recovery
    from the insurer and not [the tenant]. He concluded 
The
    language of the lease does not clearly and expressly reflect the parties' joint
    intention of permitting the landlord's insurer to recover damages from the
    defendants in the event of a fire loss caused by the defendants.

[8]

The limiting language of s. 7.02, according to
    the motion judge, meant that the tenant was not relieved of any liability
to
    third parties
for its negligence. The tenants obligation in s. 7.04 to
    acquire commercial general liability insurance did not shift liability for damage
    by fire from the landlord to the tenant because the tenants insurance is
    intended to indemnify the landlord for joint and several liability from third-party
    claims.

[9]

The motion judge noted that the lease,
    elsewhere, specifically addressed the issue of subrogation but s. 7.02 did not.
    Section s. 7.04, which required the tenant to take out commercial general
    liability insurance, expressly excluded any subrogated claim by the tenants
    insurer against the landlord. He reasoned that if the parties had intended to depart
    from the general rule, they could have used similar language in s. 7.02 and expressly
    addressed and permitted the landlord's insurer a right to subrogate against the
    tenant.

[10]

The motion judge also referred to s. 7.04s
    requirement that the tenant acquire insurance coverage for $5 million. He
    considered that, if the tenant were liable for damage from its negligence, it
    did not make commercial sense for the lease to require the landlord to take out
    insurance of at least $10 million, and yet require the tenant to acquire
    insurance only in the amount of $5 million.

[11]

The motion judge concluded that the language in
    s. 7.02 referring to the tenant's negligence did not create a right of
    subrogation for the landlords insurer and so dismissed the action.

C.

Analysis

[12]

The parties agree that the standard of review in
    this appeal is correctness. In a case that similarly involved the application
    of the trilogy in the interpretation of a lease, this court decided the
    standard of review was correctness:
Deslaurier Custom Cabinets Inc. v.
    1728106 Ontario Inc
.,
2016 ONCA 246
,
[2016] O.J. No. 1705. Justice
    Cronk, writing for the court, pointed out, at para. 26, the general standard
    stated in
Creston Moly Corp. v. Sattva Capital Corp
.
, 2014 SCC
    53, [2014] 2 S.C.R. 633 (S.C.C.) was not absolute and:

the correctness standard may apply to questions of contractual
    interpretation where it is "possible to identify an extricable question of
    law from within what was initially characterized as a question of mixed fact
    and law" (citation omitted). "Extricable questions of law" in
    this context include legal errors involving "the application of an
    incorrect principle, the failure to consider a required element of a legal
    test, or the failure to consider a relevant factor" (citation omitted).

[13]

In this case, there was an agreed statement of
    facts and the motion judges reasoning was restricted to the interpretation of
    the wording of the lease in light of the legal principles enunciated in the
    trilogy.

[14]

The motion judges analysis erred in principle
    by proceeding as if the Supreme Court, in the trilogy, pronounced a rule of
    general application. The motion judge repeatedly referred to the general
    rule. The starting point for the analysis is that in the trilogy the Supreme
    Court did not enunciate freestanding principles. The principles drawn from the
    trilogy are contractual in nature. They are conclusions that flow from and
    reflect the particular provisions of the leases that were in issue in those
    cases.

[15]

In the trilogy, the Supreme Court determined
    that it is the terms of the lease that establish the rights and obligations
    between landlord and tenant, and not the insurance policy. In
Agnew-Surpass,
Laskin C.J. stated, at p. 230, that the question of the scope of the indemnity
    as it arises in this case is not dependent on the policy but, rather, so far as
    the lessor and lessee are concerned, on the terms of the lease. In
Pyrotech
    Products
, Laskin C.J. said at p. 41 the relations between landlord and tenant
    in respect of the tenant's liability to the landlord for damage from fire
    caused by negligence must be determined on the basis of the lease and not by
    reference to insurance policy considerations.

[16]

The trilogy has not affected the fundamental tenet
    of contractual interpretation that it is necessary to discern the intentions of
    the parties in accordance with the language they have agreed to in the
    contract. The motion judge recognized that his task was to interpret the lease
    in accordance with the intentions of the parties, but he allowed the principles
    of the trilogy to override the plain language of the lease.

[17]

The appeal turns on the proper construction of s. 7.02. The entire
    clause reads:

Section 7.02 Landlords Insurance  Mandatory

The Landlord shall take out and maintain, to the full
    replacement value, fire and other hazard insurance, as the Landlord in its sole
    discretion may deem advisable, on the Building, excluding any property thereon
    with respect to which the Tenant or other tenants are obliged to insure, and
    its own general liability insurance, including general liability insurance in
    respect of the Common Areas in an amount no less than $10,000,000.00 in respect
    of any injury to or death of one or more persons and loss or damage to the
    property of others, the costs of which shall be included in Common Expenses.

Notwithstanding the Landlords covenant contained in this
    Section 7.02, and notwithstanding any contribution by the Tenant to the cost of
    any policies of insurance carried by the Landlord, the Tenant expressly
    acknowledges and agrees that

(i)

the Tenant is not relieved of any liability arising from or contributed
    to by its acts, fault, negligence or omissions, and

(ii)

no insurance interest is conferred upon the Tenant, under any policies
    of insurance carried by the Landlord, and

(iii)

the Tenant has no right to receive any proceeds of any policies of
    insurance carried by the Landlord.

[18]

The first part of s. 7.02 of the lease in this
    case both obligates the landlord to purchase and maintain fire insurance on the
    building and requires the tenant to pay its proportionate share of the cost of
    such insurance. This, if it were all, would be a sufficient basis for the
    application of both conclusions the Supreme Court arrived at in the trilogy.

[19]

However, s. 7.02 continues with a
    notwithstanding provision. The word notwithstanding appears twice. The
    first notwithstanding indicates the clause applies despite the landlords
    covenant contained in s. 7.02 to purchase and maintain fire insurance. This
    seems to relate to the first principle of the trilogy. The second
    notwithstanding indicates the clause applies despite the tenants
    contribution to the cost of the fire insurance policy carried by the landlord. This
    seems to relate to the second principle of the trilogy.

[20]

The two notwithstanding phrases focus directly
    on the two features that when found in leases give rise to the principles of
    the trilogy. The ordinary grammatical meaning of the two notwithstanding
    phrases is that the stipulations that follow apply despite the existence of
    these two features.

[21]

The plain meaning of s. 7.02 of the lease
    considered in isolation is that the tenant remains liable for its own
    negligence notwithstanding the landlords covenant to purchase insurance and
    the tenants contribution for the cost of that insurance. It remains to consider
    whether reading the lease as a whole dictates a different result.

[22]

The respondents submit that s. 7.04 of the lease
    supports the motion judges interpretation of s. 7.02 as referring to the tenants
    liability to third parties. Section 7.04 obligates the tenant to take out
    insurance in the amount of $5 million for third -party liability. Section
    7.04(ii) provides that the tenants insurance shall exclude the exercise of
    any claim by the tenants Insurer against the Landlord by subrogation. The
    respondents argue, and the motion judge reasoned, that this shows that the
    parties contemplated the concept of subrogation and chose not to include
    language providing that the landlords insurer would have the right to
    subrogate against the tenant in s. 7.02.

[23]

I do not agree with this reasoning. This feature
    of the lease could be viewed to favour the appellants construction. Employing
    the logic of the trilogy, s. 7.04 must be construed to be for the benefit of
    the landlord as, absent any contractual obligation, the tenant can purchase whatever
    insurance it thinks advisable. The landlord would lose the benefit of the tenants
    covenant in s. 7.04 if the tenants insurer could subrogate against the landlord.
    This was the reasoning of this court in
Deslaurier Custom Cabinets Inc.
On this analysis, the purpose for including, in s. 7.04, the stipulation that
    the tenants insurer cannot subrogate against the landlord is to establish a
    distinction with clause 7.02, where the equivalent stipulation, i.e. that the
    landlords insurer cannot subrogate against the tenant, is not included.

[24]

The respondents also argue, if the parties
    intent was to make the tenant ultimately responsible for all damages, it does not
    make sense for the lease to require the tenant to maintain only $5 million in
    insurance, while requiring the landlord to maintain $10 million in insurance.
    This is especially so, they say, considering the tenant occupies only a small
    portion of the building. They go on to submit it is not commercially reasonable
    to require a small tenant to insure the entire building and the landlords
    associated damages.

[25]

I do not find these arguments persuasive. The
    interpretation advocated by the appellant does not require the tenant to insure
    the entire building, but only to insure for damages due to its own negligence. It
    would not be commercially unreasonable for the parties to regard it as unlikely
    that the negligence of a small tenant would destroy the entire building.
    According to the appellants statement of claim, the actual damage to the
    building in this case was in the order of $4 million. I see no basis to
    conclude that the leases allocation of $10 million of risk to the landlord and
    $5 million to the tenant is commercially unreasonable.

[26]

The appellant points to a number of clauses that
    support its interpretation of s. 7.02. For example, several provisions impose
    on the tenant the contractual obligation to repair damage to the building
    resulting from the tenants negligence. The respondents submit these provisions
    should be read to address only the tenants liability to third parties.

[27]

There are, however, no words in the lease that
    support such a construction. The lease must be interpreted in accordance with
    the language the parties have used. In law, a tenant is liable for damage
    caused by its negligence. The question is whether the parties to a lease have
    contracted that the ordinary principles of negligence law will not apply and
    the tenant will not be liable to the landlord for damages caused by its
    negligence. In my view, the parties to this lease have not done so.

[28]

According plain meaning to the language of s.
    7.02 does not make the clause inconsistent with the lease as a whole. The lease
    provides in clear, express and unambiguous language that the tenant has the
    benefit of the insurance the landlord has covenanted to purchase in all
    circumstances except where the damage is caused by its own negligence. The
    motion judge erred in not giving effect to this language.

D.

Conclusion

[29]

I would allow the appeal, set aside the motion
    judges order and replace it with an order answering the question posed on the
    stated case No.

[30]

Reflecting the agreement of counsel, I would fix
    the appellants costs of the appeal in the amount of $10,000, and the
    appellants costs of the motion in the amount of $10,000, both amounts
    inclusive of disbursements and HST.

Released: AH MAY 18 2018

R.G. Juriansz J.A.

I agree. Alexandra Hoy
    A.C.J.O.

I agree. B.W. Miller
    J.A.


