Clarifying the “Trilogy” and the Covenant to Insure: Royal Host GP Inc. v. 1842259 Ontario Ltd.

Introduction

In Royal Host GP Inc. v. 1842259 Ontario Ltd., 2018 ONCA 467, the Ontario Court of Appeal reversed the motion judge’s decision, clarified what is known as the “Trilogy” and allowed a landlord to advance a subrogated action against an at-fault tenant.

Facts of the Case

The appellant owned a commercial building which operated as a hotel.  The respondents leased part of the building which operated as a restaurant.

The lease contained provisions common in commercial leases.  The landlord was required to obtain fire insurance and the tenant contributed financially to the premiums for that insurance. The lease contained a provision that the tenant was not relieved of any liability arising from or contributed to by its acts, fault or negligence.

There was a fire in the kitchen of the restaurant, which caused damage to the building.  The appellant claimed that the fire was caused by the respondents’ negligence.  The appellant’s insurer provided indemnity for those losses.  The insurer then commenced a subrogated action against the respondents seeking damages.  The respondents argued that the terms of the lease barred the subrogated action and sought dismissal of the claim.

Decision of the Motion Judge

Relying upon the “Trilogy”, the motion judge dismissed the appellant’s action.

The Trilogy refers to three Supreme Court of Canada decisions: (1) Agnew-Surpass v. Cummer-Yonge, [1976] 2 S.C.R. 221; (2) Ross Southward Tire v. Pyrotech Products, [1976] 2 S.C.R. 35; and (3) T. Eaton Co. v. Smith et al., [1978] 2 S.C.R. 749, which form the basis for the analysis of commercial leases in subrogation claims.

The Trilogy sets out two principles: first, a landlord’s covenant in a lease to insure the building is a contractual benefit enjoyed by the tenant.  Second, when a tenant pays for the insurance coverage, it should gain the benefit of the insurance coverage.

Relying upon these principles, the motion judge stated that “[a]s a general rule, courts have limited the rights of an insurer when a landlord covenants to pay for the insurance and agrees to look to its own insurer for any loss.”

Decision of the Ontario Court of Appeal

The Court of Appeal held that the motion judge erred when interpreting the Trilogy and allowed his interpretation to override the language of the lease.  The Trilogy did not “enunciate any freestanding principles.”  Rather, the principles drawn from the Trilogy are contractual in nature and reference must be made to the particular terms of the lease in issue.

In this case, the Court of Appeal referred to a number of provisions in the lease which made it clear that the risk of loss by fire was to be borne by the tenant if it was responsible for the loss.

The terms of the lease established the rights and obligations between the parties.  As there was nothing in the lease that suggested the ordinary principles of negligence law did not apply or suggested the insurer could not commence a subrogated action, the Court of Appeal allowed the action to proceed.

The decision illustrates the importance of considering the particular language of the commercial lease in issue when determining whether a subrogated action can be pursued.