Prezzo held a sub-lease of a ground floor and basement restaurant. In the lease, Prezzo’s landlord covenanted to “insure the premises in accordance with its obligations” as tenant under a head lease of the entire building. The head lease obliged Prezzo’s landlord to insure the whole building. Prezzo was obliged to maintain and repair the restaurant premises “except for the damage caused by such of the insured risks as the landlord is obliged to insure against” and to pay a contribution towards the landlord’s cost of the insurance premium.
A fire at the restaurant damaged both the restaurant and the rest of the building. This was presumably the fault of Prezzo. The insurer paid out insurance money to the landlord under its insurance policy but then sought to claim for all its losses against Prezzo by way of subrogation – in other words, standing in the shoes of the landlord to claim against Prezzo.
Subrogation : The principle of subrogation allows an insurer to be placed in the position of the insured and to benefit from all of the rights and remedies the insured may have against a third party. However, because a landlord usually insures premises at the tenant’s expense, it normally means that the insurance is regarded as benefitting both the landlord and the tenant, and this in turn usually prevents a landlord’s insurers from subrogating to claims the landlord may have against the tenant in respect of insured damage.
Decision : In this case, the court decided that the insurer was unable to subrogate to the landlord’s claims in respect of losses concerning the tenant’s restaurant premises. This was because in the lease, the landlord had agreed to insure the restaurant premises and therefore impliedly agreed that the insurance was for the tenant’s benefit and so there would be no subrogation. However, alarmingly for Prezzo, the court decided that the landlord could subrogate in relation to its claims in respect of losses to the rest of the building. This was because the landlord had not agreed with the tenant to insure the whole of the building. Even though it did insure the rest of the building, it was not regarded as being for the tenant’s benefit and so the landlord could subrogate.
The “takeaways” for tenants are:
- A tenant should ensure that the landlord is obliged to insure the whole of the building, in respect of which the tenant’s premises form only part, and not just the tenant’s premises; and
- A tenant should ask the landlord to obtain evidence of a waiver by its insurers of subrogation rights with regard to claims against tenants.
Tenants also have a wider interest in making sure that the building is fully covered. Access and essential services to the premises may be obtained over other parts of the building. It is essential that those parts are agreed to be covered by the landlord so that access and services can be reinstated where insured damage occurs.
The principle that an insurer may not bring proceedings against a third party by way of subrogation where the insured has previously agreed, either expressly or by implication, with the third party that the insurance would exist for the benefit of that party was laid down in a case called Mark Rowlands Limited v Berni Inns Limited [1986]. Most typical lease covenants, whereby the landlord insures the building and the tenant pays the premium cost, should automatically achieve this but best practice for a tenant is to ensure that the landlord is obliged to use all reasonable endeavours to obtain from the insurers evidence of a waiver of subrogation rights with regard to tenants.
The case is Prezzo Limited v Highpoint Estates Limited [2018].
This is not legal advice; it is intended to provide information of general interest about current legal issues.
