In April 2018 the case of Prezzo Limited v High Point Estates emphasized the issues for tenants and future tenants to be more cautious when it comes to the cost of reinstatement and the right of subrogation.
Prezzo Ltd had a lease of a ground floor property including the basement using the space as a restaurant. There was a fire in the restaurant which caused damage to the restaurant and the rest of the building. The landlord’s insurers paid the claim, and subsequently used its right of subrogation, by making a claim against Prezzo.
What is a subrogation clause?
Subrogation describes the process of a third party having the right to pursue and collect damages. Which in this case describes the legal rights held by insurance companies to collect on claims. Where an insurer has paid out money to an insured, the common law rules on subrogation allow the insurer to recoup all or some of that money from any third party who caused or contributed to the loss. The rules on subrogation mean that once an insurer has paid out under an insurance contract, the insurer can “step into the shoes” of the insured and acquires the following rights:
- The right to use the insured’s name to proceed against any third party who was responsible for causing the loss.
- The right to claim from the insured any sums received by way of compensation from that third party.
This meant that in this case, the insurer had the right to “step into the shoes” of the landlord and claim against Prezzo.
The case then went to Court, and the Court decided in respect of the restaurant premises, no claim could be brought against the tenant. The landlord’s insurance referred to in the Lease was sufficient enough for both the landlord and tenant for the restaurant. There was also no mention within the Lease that the landlord’s insurance obligations included the entire building.
However, the landlord’s insurers’ were able to exercise a right of subrogation against Prezzo to the remainder of the building the fire had caused damage to, even though the Lease terms limited the landlord’s insurance obligations to the restaurant only.
The outcome was most probably not what the landlord and tenant intended when they negotiated the lease however a waiver of subrogation clause by the landlord in the lease would prevent this result and the landlord’s insurance company would not be able to claim against the tenant.
Therefore when entering into a Lease the tenant should check what the landlord is required to insure against, to make sure they are not in a vulnerable position if the landlord ever had to make a claim.
Subrogation can cause a problem in the context of leasehold property. Where the landlord insures at the tenant’s expense and structures the lease so that in effect the insurance is for the joint benefit of the landlord and the tenant, subrogation would allow the insurer to sue the tenant for the cost of reinstatement where the damage was caused by the tenant’s fault. Assuming that the tenant has not caused the damage maliciously, subrogation in these circumstances leaves the tenant in a difficult position. It cannot insure to protect itself against its own negligence or misfortune, must pay for insurance from which it is intended to benefit and also pay for the damage if a subrogation claim is made against it. Subrogation can effectively negate the benefit of insurance for which the tenant has paid.
What can the tenant do?
- For commercial property, the insurance policy may contain a generic waiver by the insurer of its subrogation rights against tenants. This should be checked.
- In the absence of a generic waiver, the tenant may try to negotiate with the landlord to secure a specific waiver by the insurer of the insurer’s subrogation rights against that tenant. Even if the landlord can secure this from its current insurer, it will not be able to dictate that future insurers will do likewise. The landlord should, therefore, avoid any obligation to secure such a waiver.
- Some insurance companies are prepared to enter into voluntary agreements not to exercise subrogation rights in certain circumstances. These are sometimes referred to as “Lister v Romford Ice Agreements”.
- It appears that, in recent years, insurance companies may be less inclined to exercise subrogation rights against a party whose interest in the policy has been noted. This practice should not, however, be relied upon.
- The rules on subrogation may be softened in certain circumstances where it can be said that the landlord had no right under the lease to sue the tenant.