Principle Of Immunity Implied Releases Trilogy Scope Widens Further

Since the 1970s, a series of three Supreme Court of Canada cases - commonly referred to as the "Trilogy" - has established a common law principle to assist landlords and tenants in allocating risk in the absence of express provisions. This principle provides that the risk of loss or damage caused by peril rests on the party who has covenanted to obtain insurance to cover such peril or who has had their cost of insurance partially reimbursed by the other party, subject to express language to the contrary. The intent being that the party should look to the insurance to fund the loss, even if the other party is negligent. In Youn v. 1427062 Alberta Ltd. (Red's Pub), 2016 ABQB 606, the Courts further developed this principle by finding that the insurance obtained by the Landlord was for the benefit of the Tenant, even where there was no express covenant on the Landlord to obtain such insurance and even where the Tenant was not specifically paying its share of occupancy costs.

This case involved a subrogated claim by the Youns' ("Landlord") insurer against Red's Pub ("Tenant"), which arose after the premises leased to the Tenant was destroyed by patrons who started a fire in the washroom. The Tenant carried liability insurance but did not carry fire insurance, while the Landlord did carry fire insurance. The Landlord's insurer brought an action against the Tenant for damages due to negligence. The Tenant, in turn, applied for summary judgment dismissing the Landlord's action and claiming that it was entitled to benefit from the Landlord's fire insurance.

The lease agreement was a "gross" lease where the Tenant paid a base rental with no obligation to pay property taxes or a share of common area costs. The Tenant's insurance obligations did not include fire insurance and the Tenant's repair covenant expressly excluded damage by fire. There was no express covenant requiring the Landlord to obtain fire insurance but the Lease made the Tenant responsible for any increased costs if the Tenant did something to increase the Landlord's fire insurance premiums.

Based on a reading of the agreement as a whole, the Court found that there was an inferential covenant on the Landlord to obtain fire insurance, which, even in the absence of an express covenant to obtain such insurance, was for the benefit of the Tenant. In addition, although the Lease contained an indemnity that required the Tenant to indemnify the Landlord for its negligence, the Court found that it was generic in nature and could not override the specific provisions in the Lease, such as the express exclusion of damage by fire from the Tenant's repair covenant. The Tenant's application to dismiss the Landlord's claim was granted.

The authors previously reported on Deslaurier Custom Cabinets Inc. v. 1728106 Ontario Inc., 2016 ONCA 246 ("Deslaurier") in our 2016 article, which was an update on the Superior Court decision in our 2015 article. As a reminder, the Court of Appeal found that the Superior Court failed to properly apply the principles of contractual interpretation and relevant case law and erred in finding that the Landlord's indemnity took priority over the Tenant's obligation to insure. The Tenant's obligation to insure against all risk of loss or damage to its own property caused by fire relieved the Landlord from liability. In addition, the Tenant should not have been able to bring a subrogated claim against the Landlord because the Tenant would not have been able to bring such a claim if it had complied with its obligation to add the Landlord as an "additional insured".

The Tenant sought leave to appeal this decision to the Supreme Court of Canada. While the application for leave was pending, the Supreme Court released its decision in Ledcor Construction Ltd. v. Northbridge Indemnity Insurance Co., 2016 SCC 37 ("Ledcor") and thus the Supreme Court directed the Court of Appeal to reconsider its previous decision on Deslaurier in light of the Supreme Court's ruling in Ledcor.

Ledcor was a contractual interpretation case involving an exclusion clause in an all-risk property insurance policy, a standard form contract. The ultimate issue for the Court of Appeal was whether Ledcor mandated the application of a different standard of review (the palpable and overriding standard) and whether application of that standard, if necessary, required an alteration of the Court of Appeal's decision. The Court of Appeal noted that the lease in question was a negotiated contract and therefore the Ledcor principles regarding standard form contracts had no application in this case. The Court of Appeal confirmed that they did apply the correct standard of review and affirmed their original decision. Once again the Tenant has tried to appeal this decision to the Supreme Court of Canada which, if granted, will be reported in our article next year.

DOES A LANDLORD'S FAILURE TO DEMAND ADDITIONAL RENT AND DELIVER STATEMENTS RELIEVE THE TENANT FROM PAYING ADDITIONAL RENT?

The principles of promissory estoppel are well settled and require the party relying on the doctrine to establish that the other party has, by words or conduct, made a promise or assurance, which was intended to affect their legal relationship and which the party, in reliance on the representation, has acted on or in some way changed their position because of it. Closely tied to the doctrine of promissory estoppel is the doctrine of waiver, which is only found when the evidence demonstrates that the party waiving had (1) full knowledge of rights; and (2) an unequivocal and conscious intention to abandon them.

These principles were applied in 2373322 Ontario Inc. v. Nolis, 2017 ONSC 1518 ("Nolis"), where the Landlord only demanded additional rent from the Tenant after almost two and a half years. The applicant Tenant purchased a previous tenant's business on October 1, 2013. The Tenant did not pay any additional rent between October 1, 2013, and February 23, 2016, and argued that the Landlord never advised it of the amounts required to be paid, never provided any supporting documentation, and never demanded payment until February 23, 2016, when the Landlord demanded arrears of additional rent and additional rent going forward.

The Tenant brought an application arguing, among other things, that the Landlord was not entitled to arrears of additional rent on the basis of (1) promissory estoppel, (2) waiver, (3)...