In a typical commercial lease each of the landlord and tenant
will have various insurance obligations. The lease will also have
various provisions that allocate risk between the landlord and the
tenant, with the allocation often consistent with the insurance
One common regime in respect of insurance and risk is to provide
a mutual release whereby each of the landlord and tenant release
the other in respect of damages and losses that are covered by the
insurance required to be obtained by the releasing party. For
example, a tenant will typically be obligated to insure its
personal property in the premises and the landlord will therefore
be released from any damage to that property, even if caused by the
landlord. Similarly, the landlord will typically be obligated to
insure the building itself (with the ability to charge the cost as
an operating cost) and therefore the tenant will be released from
any damage to the building even if caused by the tenant.
A lease may provide for this regime by way of mutual releases as
described above and/or by waivers of subrogation from their
respective insurers. Under a waiver of subrogation, the insurer
gives up its right to subrogate and proceed against the party that
has the benefit of that waiver even when that party caused the
insured loss. The release is equally effective because the insurer
can have no greater rights than the insured and, if the insured has
already released another party, the insurer is bound by that
This case involves water damage to certain premises of tenants
at Yorkdale Mall. The damage was caused by a vandal entering the
mall and opening a fire hose cap in certain space occupied by
EllisDon in connection with construction activities. Those tenants
started an action against EllisDon for the damages suffered.
EllisDon brought a motion for judgment submitting that there was no
genuine issue requiring a trial.
The position put forward by EllisDon was based on the
the Yorkdale form of lease (like most commercial leases)
requires the tenants to place and maintain insurance to cover water
damage claims on their premises;
the landlord is obligated to maintain similar insurance for its
there is a mutual release and waiver between the landlord and
the tenant for any occurrences which are the subject of insurance
the mutual release was drafted so it extends to damage caused
not only by the other party but also by any other person for whom
the party benefitting from the release is in law responsible;
as a result, EllisDon submitted that the waiver of subrogation
prevents the tenants from bringing an action against EllisDon
because EllisDon is an entity for whom the landlord was responsible
and the tenant released the landlord and all those for whom it is
in law responsible from water damage, even where the landlord and
those for whom it is responsible was the cause.
EllisDon was successful. The court held that the purpose of the
lease terms is to allocate risk between the landlord and the tenant
and to require each party to insure its portion of the risk. While
there is a general legal principle that a person must be a party to
a contract in order to benefit from it, the court held that such
doctrine did not operate here. To prevent a third party from
relying on a limitation of liability clause, such as is found in
this lease, would not respect allocations and assumptions of risk
made by the parties to the contract and would ignore the practical
realities of insurance. It was exactly this kind of situation that
was contemplated as coming within the scope of the lease.
As a result, the tenants would have to look to their insurance
in order to recover any losses from the water damage. The landlord
and EllisDon (being a party for whom the landlord was in law
responsible) were not liable as that risk had been allocated to the
tenant under the terms of the lease.
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