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The Tale of Red's Pub - Risk Allocation in Commercial Leases

 May 14, 2018 4:00 PM
by Lindsay Woods

In Youn v 1427062 Alberta Ltd., the Alberta Court of Queen’s Bench considered risk shifting in the context of a commercial lease.

In this subrogated matter, the appellant landlord owned a commercial property that included the respondent’s pub, Red’s Pub, and neighbouring businesses. A fire broke out in Red’s Pub and the pub was destroyed. The fire caused damage to a neighbouring businesses. The landlord’s insurer commenced a subrogated action against Red’s Pub for the damage.

Red’s Pub successfully brought an application to dismiss the claim. The Master concluded that the landlord was barred from advancing any action against Red’s Pub as the lease, when read as a whole, transferred the risk of loss by fire to the landlord. The landlord appealed the decision of the Master.

On appeal, the Alberta Court of Queen’s Bench reviewed several clauses in the lease and found that the landlord assumed the risk of loss by fire. The lease specified that Red’s Pub was responsible for any increase in the cost of fire insurance caused by its conduct. The court held that this term implied that the landlord intended to carry fire insurance. In addition, the lease required the premises to be kept in good repair, except when there was damage from fire. The lease specifically required that Red’s Pub carry insurance against burglary, glass insurance, public liability, and property damage. There was no specific reference to fire insurance. Finally, it was provided in the lease that if Red’s Pub could not be repaired within 120 days of fire damage, then the lease would terminate.

After reading all of the sections of the lease together, the court held the landlord impliedly agreed to obtain fire insurance for the benefit of Red’s Pub. As a result, the appeal was dismissed.

This decision underscores the importance of completing a detailed review of all leasing documentation in advance of pursuing a subrogated action.

Youn v 1427062 Alberta Ltd.

Lindsay Woods is a lawyer in our Toronto office.

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