Can a landlord’s insurer recover the cost of repairs to commercial premises negligently damaged by a tenant, even if the tenant pays for the insurance cover through recoverable outgoings?

A recent decision of the Supreme Court of Western Australia – citing a Queensland ruling of almost 20 years ago – illustrates the danger posed to tenants in this rare but devastating situation and how a carefully drafted lease can avoid a catastrophic outcome.

Hay Australia P/L leased three hay baling sheds on the Brand Highway at Muchea in country W.A.

A fire started – by spontaneous combustion – in a bale builder that was decommissioned one month earlier in the north-western corner of the sheds.

The landlord’s insurer paid the repairs and then claimed against the tenant (in the landlord’s name) under its insurance policy subrogation right.

The lease specifically provided that the tenant must keep the premises “in good and substantial repair and condition except for fair wear and tear and damage covered by insurance taken out by the landlord”.

That provision was however made subject to a more general term that the tenant could only be made responsible for “major structural replacement” if required because of “an act, omission or neglect of the tenant or the tenant’s employees”.

The tenant applied for summary judgement to dismiss the landlord’s claim and – in the absence of “any case in Australia that has directly determined the question” – relied on authorities from USA, Canada, New Zealand and the UK to support the proposition that the insurer could not subrogate against the tenant in such circumstances.

But Master Craig Sanderson noted that all of the decisions cited in support of the application “have persuasive dissenting judgements”.

The Master resorted to one of only two first instance Australian cases which dealt with the issue in refusing summary dismissal application because “there was a serious issue to be tried”.

That concerned Brisbane industrial premises fire where tenant – as part of its business – heated resin in a hot metal ‘kettle’.

The insurer was able to sue the tenant for the cost of rectification of the premises because the landlord’s insurance policy – funded by the tenant’s outgoings payments – did not note the tenant’s interest.

The Supreme Court of Queensland in that case held as the lease also provided the tenant was responsible for structural repairs necessitated by “lessee’s negligence”, the lease contained no implied term that the insurance monies received should be applied in discharge of the tenant’s liability for the fire damage.

Justice Margaret White noted in that case that such conclusion could be avoided by agreement between the parties that the landlord “waives its right of recovery”; and/or that the fire insurance proceeds “be to the benefit of both parties”.

Brand Hwy Pty Ltd v Hay Australia Pty Ltd [2015] WASC 375 , Master Sanderson 08/10/2015