Insurance trap for tenants

A recent case highlights a trap for unwary tenants where a lease contains an inadequate landlord's reinstatement clause.

In Prezzo Ltd v High Point Estates Ltd, decided at the end of April, Prezzo held a lease of the ground floor and basement of the landlord's building which it used as a restaurant. Unusually, the landlord's insurance obligation in the lease was only to insure the premises, not (as is desirable) the whole of the building.

A fire in the restaurant damaged the premises and the remainder of the building. The landlord's insurer paid for reinstatement of the building - and then exercised its right of subrogation to sue the tenant to recover the amounts it had paid out under the insurance policy in relation to damage to the remainder of the building.

The right of subrogation allows an insurer to sue a tenant in the name of its landlord to recover losses that the insurer has paid out.

Rights of subrogation

Normally, a tenant would be protected against an insurer exercising its right of subrogation in one of two ways. The insurer may give an express waiver of the right of subrogation. Or, if 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 following the principle in Mark Rowlands Ltd v Berni Inns Ltd [1986] QB 211.

The case

The issue in the Prezzo case was that the insurance provisions in the lease related only to the demised premises, not the building, and there was nothing in the drafting of the lease that could be construed as widening the landlord's insurance obligations to include the building as a whole. Even though, in this case, a superior lease required the landlord to insure the building as a whole, the terms of Prezzo's lease expressly limited the landlord's insurance obligations to Prezzo's premises.

The court therefore held that the implied waiver applied only in respect of damage to the premises. The implied waiver did not apply to damage to the remainder of the building and the insurer was therefore able to exercise the right of subrogation against Prezzo in respect of the amounts it had paid to the landlord to reinstate the remainder of the building.

Conclusion

This case illustrates the complexities of insurance law and a salutary lesson to tenants negotiating terms for a lease of part of a building. No tenant or property owner expects a fire to destroy the property or building of which it forms part but protection and security in that eventuality is essential and should not be overlooked or disregarded.

The full transcript of this case is not yet available.

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