Our Commercial Property department looks at the landlord’s insurance obligations under a lease after a High Court decision made early this year.
The decision made in Prezzo Ltd v High Point Estates Ltd  offers no comfort to tenants. It may appear obvious, but this case reinforces the importance of carefully considering the wording of a lease. More specifically, to look carefully at the insurance provisions to find out what exactly the landlord is covenanting to insure.
When it comes to insurance, the common position is for the landlord to insure the premises with the tenant paying the cost of the premiums under the provisions of the lease. In this way the landlord is regarded as having insured the premises for the joint benefit of both the landlord and the tenant. This was the rule found in the case of Mark Rowlands Ltd v Berni Inns Ltd  (the ‘Mark Rowlands’ rule). By applying this, an insurance company will be prevented from exercising its rights of subrogation against a tenant in result of damage to the premises i.e. the tenant cannot be called to pay back the insurers for what it might have paid out to the landlord.
In Prezzo, the issue at hand was whether the ‘Mark Rowlands’ principle also prevented the insurers from exercising its right of subrogation against a tenant in respect of damage to the rest of a building that the tenant did not occupy.
In this case, the tenant was the leaseholder of a restaurant which was situated on the ground floor and in the basement of a building – the area that the tenant occupied was defined in the lease as ‘the premises’. The lease contained a covenant by the landlord to ‘insure the premises in accordance with its obligations’ in the superior lease that it held the property under. The insurance provisions in the superior lease required the landlord to insure the whole building of which the premises formed part. The landlord was also obliged to pay the rent and perform the covenants under the superior lease. The tenant was obliged to contribute towards the cost of the insurance that was put in place.
A fire emanating from the restaurant caused damage to the restaurant area and other parts of the building. The insurer indemnified the landlord under the policy for the damage to the building and sought to recover those costs from the tenant. Since the insurance effected for the restaurant was for the benefit of both the landlord and tenant, no claim could be brought against the tenant (the ‘Mark Rowlands’ rule) in respect of the area demised to the tenant – the premises. The insurers, however, alleged that a claim could be brought against the tenant in respect of damage caused to the rest of the building.
The Court held that the landlord’s insurers could make a claim against the tenant for loss and damage to the building (but not the restaurant). The reason being that the landlord was not obliged to insure the building on behalf of the tenant. There was no obligation in the lease requiring the landlord to insure the building. The landlord was only obliged to insure the restaurant i.e. ‘the premises’. Both ‘premises’ and ‘building’ were defined terms in the lease. If there had been intention to include the whole of the building, the lease could have and should have said so.
The words ‘in accordance with’ did not have the effect of converting the obligation to insure the premises into an obligation to insure the whole building. That clause was intended rather to indicate the standard and nature of the obligation which is ‘to insure the premises…’
Careful consideration should be given to the obligations on each party as to insurance when a lease is entered into. If a tenant is occupying only part of a building and the obligation on the landlord is only insure that part rather than the whole of the building, the above case shows the impact that could have. It could turn out to be a costly piece of drafting for a tenant if the wrong circumstances were to arise. Even when only taking a lease of part of a building it would be wise for the tenant to insist that the insurance obligation on the part of the landlord is one to insure the whole building.
If you have any questions or would like to discuss any of the issues raised in this blog, please feel free to contact our Commercial Property team.