Ross Southward Tire v. Pyrotech Products, [1976] 2 SCR 35

The three year policy is therefore $447.70. Per annum, it appears to be $159.23.

From Aug. 12, 1968 to Aug. 12, 1969, the amount is $159.23.

A pencilled notation corrected the arithmetic to show the annual amount as $149.23, and a cheque for this sum dated September 30, 1968, was sent to the respondent’s predecessor in title and was cashed.

The tenant was unaware of the nature of the fire insurance policy taken out by the lessor. It was in fact a composite mercantile policy, effective August 12, 1968 for a three year period, with Aetna Insurance Company, covering fire and other perils such as explosion, lightning, windstorm and hail, burglary damage to the building and comprehensive liability insurance. Only the premiums for

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the fire and related coverage, and burglary damage, the major portion of the overall premium, were billed to the tenant by the lessor.

The fire destroyed the building completely, and it was rebuilt at a cost of about $50,000. This sum and related costs, including loss of three months’ rent, amounting in all to $54,975.42, were claimed from the tenant by Aetna Insurance Company by way of subrogation to the landlord’s rights against the tenant. No issue is taken here with respect to the quantum of damages. It is obvious that the fire insurance covered the lessor with respect to loss by fire occasioned by a third person’s negligence, but the question at issue here is whether the risk of loss by fire, including the risk of loss by reason of the negligence of the tenant or its employees, passed to the landlord under that provision of the lease which obligated the tenant to pay insurance rates.

Both the trial judge and the Ontario Court of Appeal found in favour of the plaintiff respondent; the former on the basis that the landlord’s right to recover its loss from a negligent tenant was not affected by the tenant’s obligation to pay insurance premiums and because such payment did not make the tenant an insured under the landlord’s policy; the latter, because the tenant’s covenant to pay insurance rates did not create an obligation on the landlord’s part to insure and, even if it did, the only obligation was to effect insurance covering the usual hazards in respect of leased premises and these did not include coverage to protect the tenant against liability for waste owing to its own negligence. In my opinion, the approaches of the trial judge and of the Court of Appeal involve a translation of the terms of the lease into a suppositious fire policy under which the tenant would either be an insured or the landlord as the insured would not seek coverage for fire resulting from a tenant’s negligence. In my opinion, neither of these suppositions is dispositive of this appeal nor, indeed, does either of them accord with the issue raised by the lease or with the facts under which the claim against the appellant was made.

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The subrogated insurer’s position in this litigation against the tenant is, admittedly, no better than that of the landlord itself. Even on the view taken by the Court of Appeal that the landlord, if obliged to insure, would seek only the usual coverage, I am unable to follow the conclusion that such coverage would not embrace loss resulting from a third party’s negligence. The embrace of fire loss so resulting is clear under s. 118 of The Insurance Act, R.S.O. 1970, c. 224, and is standard or usual coverage. Upjohn v. Hitchens^[2], upon which the Court of Appeal relied in this connection, turned on a covenant by the lessee to insure against loss by fire, and the question was whether there was a breach of covenant when the policy effected by the lessee excluded loss by fire caused by enemy aircraft. Evidence which was held to be admissible showed that it was not usual to insure against aircraft risks and, accordingly, a majority of the Court of Appeal concluded that the lessee was not in breach of his covenant to insure. In so far as the principle of this case is applicable here, it would lead to an opposite conclusion to that which the Ontario Court of Appeal reached on this point.

Counsel for the appellant did not urge (indeed, he stated that it was not necessary to his position) that the landlord was in breach of a covenant to insure and that the covenant should have embraced risk of loss by fire resulting from the tenant’s negligence. Rather, it was his contention that under the provision of the lease respecting payment of insurance rates by the tenant, the risk of loss by fire passed to the landlord, at least upon the presentation by the landlord of the insurance bill, and that the matter thereafter was between the landlord and its insurer. I agree with this contention. Applying to the lease and to the provision in question the ordinary test of reading it reasonably and in a business sense, I see no other meaning that can be given to the lease short of reading the relevant words out of it. The trial judge suggested that the landlord’s intention was

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to get a fixed amount by way of rent for its investment and to throw all other expenses upon the tenant. That may have been a tenable view if the other expenses had not been enumerated and if the lease be taken as denying the tenant any benefits from its obligatory outlays. But that is not this case.

Counsel for the respondent contended that there was no exculpatory provision in the lease to relieve the tenant of liability for negligence nor could any such term be implied. Such a view is too sweeping in ignoring the effect of the provision as to payment of insurance rates. The tenant may well be liable to answer for negligence in other respects but, in my opinion, it is entitled to rest in respect of loss by fire on the discharge of its obligation to pay for fire insurance.

A number of cases, other than that already cited, were relied upon by the respondent in support of its position. They included United Motors Service Ltd. v. Hutson^[3], Shell Oil of Canada Ltd. v. White Motor Company Ltd.^[4], Norman v. J.L. Edwards Motor Sales Ltd.^[5] and Cummer-Yonge Investments Ltd. v. Agnew-Surpass Shoe Stores Ltd.^[6] The first two involved the relationship between a tenant’s covenant to repair, fire, lightning and tempest excluded, and a landlord’s covenant to pay insurance premiums where a fire occurred by reason of the tenant’s negligence. There was an element in the Shell Oil case not present in the Hutson case, in that the tenant covenanted to pay any increased premiums necessitated by the nature of its business. This latter feature was also present in the Norman case.

I do not find these cases of any assistance in determining the present case which is concerned not with an attempt to shelter under a landlord’s undertaking to pay insurance premiums but with an assertion of a claim by a tenant to benefit from its payment for insurance pursuant to the terms of its lease. In this respect the tenant may be said to have qualified its obligation to repair beyond the

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normal exception of not being liable for accidental fire. It 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 and which the policy taken out in this case did reflect. It follows, in my opinion, that it may make a difference whether, as in the Hutson case, the landlord undertakes to pay insurance premiums and whether, as in this case, it is the tenant who covenants to pay them. The Cummer-Yonge case, which came before this Court on appeal and was heard subsequent to the hearing in this case (this Court delivered judgment on April 22, 1975, reversing in large part a judgment of the Ontario Court of Appeal adverse to the tenant), turned on a different formulation of the respective obligations of landlord and tenant as they related to insurance and the tenant’s liability for damage from fire caused by its negligence. But what that case shows is that covenant modifications of 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. The present case is of the same order.

In my opinion, the landlord’s insurer has no basis for asserting a subrogated claim in the present case.

Evidence was adduced that the appellant tenant was covered by a policy with another insurer, containing a tenant’s legal liability (fire) rider, which had been taken out when the tenant had occupied other premises, and which had been transferred by the insurer to relate to the premises of the respondent occupied by the appellant as lessee. This transfer appears to have been done as a matter of course and nothing turns on it. The policy was not taken out with any view to providing protection to the tenant against liability for loss by fire as a result of its negligence. The existence of the policy means only that litigation which in form is between a landlord and its tenant is in substance a contest between two insurance companies.

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I would allow the appeal, set aside the judgments below and dismiss the action. The appellant should have its costs throughout.

The judgment of Beetz and de Grandpré JJ. was delivered by

DE GRANDPRÉ J. (dissenting)—This appeal raises the following question: When demised premises are damaged by a fire caused by the negligence of the lessee, is the latter relieved from liability for the damages suffered by the lessor where the lease imposes upon the lessee the obligation to pay the insurance rates? The Courts below have given a negative answer to that question.

There is no doubt that in the absence of a provision in the lease which explicitly or inferentially modifies the statutory rules, a lessee is responsible to his lessor for the loss due to a fire caused by his negligence. (The Conveyancing and Law of Property Act, at the date of this lease R.S.O. 1960, c. 66, ss. 30 and 33). There is also no doubt that the stipulations of the lease in that connection must be read in the light of the principles laid down by the Privy Council in Canada Steamship Lines Ltd. v. The King^[7], and by this Court in United Motors Service, Inc. v. Hutson et al.^[8] To paraphrase Kerwin J., as he then was, in the Hutson case, the courts must determine whether or not the various clauses of the lease permit the lessee to escape payment for damages resulting from a fire caused by his negligence; to achieve that result requires strong language.

In the case at bar, the lease does not contain any explicit statement that the lessee, in the circumstances stated, should not be held responsible. On the contrary, the lease contains the following paragraph:

AND the said Lessee convenants with the said Lessor to pay rent; and to pay taxes, including local improvements; and to pay water rates; and to repair, reasonable wear and tear and damage by fire, lightning and tempest only excepted; and to keep up fences; and not to cut down timber; and that the said Lessor may enter and

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view state of repair, and that the said Lessee will repair according to notice in writing, reasonable wear and tear and damage by fire, lightning and tempest only excepted;

which provision is completed by another one in the exact terms of the clause examined by this Court in the Hutson case:

AND that he will leave the premises in good repair, reasonable wear and tear and damage by fire, lightning and tempest only excepted.

On the authority of Hutson, it is clear that the exception relative to fire in these two paragraphs does not include a fire caused by the negligence of the lessee.

However, there is a difference between the two leases in the convenant respecting payment of insurance premiums. In the Hutson lease, it read:

And the said Lessor covenants to pay all taxes in connection with the demised premises and all premiums of insurance upon the buildings erected thereon.

In the case at bar, the following typewritten paragraph has been inserted:

The Lessee shall pay all realty taxes including local improvements and school taxes, electric power and water rates & insurance rates immediately when due.

The words underlined by me, which are the basis of the appellant’s argument, were clearly added to the original text but I do not see that this has any effect on the result.

Appellant submits that this wording is not exhaustive and that the courts must infer therefrom that the parties had agreed to relieve the lessee of his normal obligation to pay the damages caused by his negligence. In other words, the courts should read the paragraph just quoted as constituting the lessee an additional insured in the policy of insurance obtained by the lessor, this result being the necessary corollary of the obligation assumed by the lessee to pay the insurance rates.

If it were necessary to find an explanation for the inclusion in the lease of a paragraph imposing upon the lessee the obligation to pay taxes, power

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and water rates and insurance rates, I would underline, as did the trial judge, that

when the lease was prepared the building had not been completed and therefore the amount of the taxes on the building, the electrical and water rates, and the insurance premiums were incapable of being accurately determined.

It made good sense for the lessor to make sure of a certain return on his investment; one way of achieving that result was to put on the shoulders of the lessee the payment of all those items which were still to be determined when the lease was signed. I do not see that the obligation assumed by the lessee to pay the insurance rates has any other meaning. Certainly it does not amount to the “much stronger language” required by Kerwin J. in the Hutson case to displace the basic statutory and contractual liability of the tenant.

Indeed no importance from the point of view of the tenant’s liability should be attached to the fact that one or the other of the parties to the lease pays the insurance rates. In the Hutson case, they were to be paid by the lessor and this stipulation did not bar recovery. Yet it certainly could not have escaped the members of this Court that, in actual fact, such an expense would be added to the carrying charges of the leased premises and would eventually find its way into the amount of the rent. If in the Hutson case the assumption by the lessor of the obligation to pay the insurance premiums did not constitute the lessee an additional insured although obviously he would eventually bear that amount, the result must be the same in the case at bar where the direct rather than the indirect route has been taken to spell out that the lessee must pay a rent that will bring the lessor an equitable rate on his capital.

In Agnew-Surpass Shoe Stores Limited v. Cummer-Yonge Investments Limited^[9], the tenant was relieved of liability because its exoneration had been defined by reference to the landlord’s obligation to insure the building. No such reference is contained in the lease under consideration and no such obligation is imposed upon the land-

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lord; on the contrary, the relevant clauses in the case at bar are substantially similar to the terms of the lease in Hutson: indeed the leases both in Hutson and here are stated to be made “In pursuance of the Short Forms of Leases Act” (now R.S.O. 1970, c. 436).

A last point. The parties clearly had in their minds what would be the consequences of a fire. They deleted from the printed portion of the lease two paragraphs reading as follows:

PROVIDED that in the event of fire, lightning or tempest, rent shall cease until the premises are rebuilt.

PROVIDED that, in the event of the destruction or partial destruction of the said premises, the Lessor may declare the term hereby granted to be forthwith terminated, and in such event rent shall be payable up to the time of such destruction or partial destruction.

which were replaced by a lengthy stipulation spelling out in substance that, if the damage caused by fire or other casualty cannot be repaired within ninety days, the lease is at an end, whereas if repairs are possible within the period of ninety days, the rent is to be adjusted in proportion to the use made of the premises. If the agreement had truly been that the lessee would never be responsible in case of fire, it would have been easy for the parties to so state. Their silence, even when read with the obligation assumed by the lessee to pay the insurance rates, is certainly not the strong language needed to displace the normal consequence flowing from a fire attributable to the negligence of the lessee.

I would dismiss the appeal with costs throughout.

Appeal allowed with costs, BEETZ and DE GRANDPRÉ JJ. dissenting.

Solicitors for the defendants, appellants: McGarry & McKeon, Toronto.

Solicitors for the plaintiff, respondent: Montgomery, Cassels, Mitchell, Somers, Dutton & Winkler, Toronto.