At first blush a tenant may think that a landlord's obligation in its lease to insure the demised premises only is good enough but it is not. The demised premises are often internal and what is required is a landlord's obligation to insure the building in which the demised premises are located. This is perhaps not so much a trap when a tenant takes a new lease as it will have the opportunity to negotiate the terms and new lease drafting will hopefully include a landlord's obligation to insure the building but a tenant must beware of this distinction when taking an assignment of an existing lease. The case of Prezzo Ltd v High Point Estates Ltd (Queen's Bench Division) (26 April 2018) is a salutary lesson on the consequences of this distinction.
Prezzo Limited was the tenant of the basement and ground floor premises of a building. Their lease contained a covenant by the landlord in favour of the tenant to "insure the premises...". A fire damaged the restaurant and the rest of the building. The insurer indemnified the landlord under the landlord's building's insurance but then sought to recover from the tenant the amounts it had paid out under the insurance policy in relation to damage to the remainder of the building. The insurer was exercising a right of subrogation which enables an insurer to sue a tenant in the name of its landlord to recover losses that the insurer has paid out.
The case of Mark Rowlands Ltd v Berni Inns Ltd [1986] QB 211 established the principle that where the landlord insures under the lease for the benefit of the landlord and the tenant, and the tenant pays the insurance premium, there is an implied waiver of the right of subrogation. It was accepted in Prezzo Ltd v High Point Estates Ltd that the waiver of the right of subrogation applied in relation to the restaurant but did it prevent recovery from the tenant in respect of damage to the rest of the building?
Unfortunately, the insurance provisions of the lease to Prezzo Limited applied only to insurance of the "premises". This was a defined term and did not extend to the building. A superior lease required the landlord to insure the building but the terms of the lease to Prezzo Limited were precise and their interpretation could not be widened. The court therefore held that the insurer was not precluded from making a claim against the tenant for damage to the building other than the restaurant.
An insured event seems like a distant possibility when a lease is acquired and hopefully will never come to pass but due to the specific drafting of the lease in this case, Prezzo Limited found itself having to pay the price for the reinstatement cost of the rest of the building.
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