Does your lease contain an adequate landlord reinstatement clause?

The case of Prezzo Ltd v High Point Estates Ltd, highlighted the problems for tenants or potential tenants to be aware of when it comes to the costs of reinstatement and the right of subrogation.

Prezzo was the lessee of the basement and ground floor, using the space as a restaurant. In the terms of the lease, the landlord’s insurance obligation was limited to the premises and not the whole of the building.

Following a fire in the restaurant, which caused significant damage to the premises as well as the rest of the building, the landlord’s insurer met the costs for reinstatement of the building – and subsequently used its right of subrogation.

Subrogation allows the insurer to recover all or some of the money from a third party who caused the loss. In essence, this means that the insurer has the right to “step into the shoes” of the landlord and sue a tenant to recover monies paid out through the insurance claim.

Ordinarily, a tenant would be protected against an insurer’s right of subrogation by the insurer waiving their right or by the landlord insuring under the lease for the benefit of both itself and the tenant, subject to the tenant paying the insurance premium.

The insurance provisions within the lease in the Prezzo case limited the landlord’s insurance obligations to Prezzo’s premises and not the building as a whole. 

No reference within the drafting of the Prezzo lease extended the landlord’s insurance obligations to include the entire building.

The court decided that the implied waiver related solely to the damage caused to the premises and not to the areas ruined in the rest of the building, allowing the insurer to exercise the right of subrogation to recover the costs of reinstating the areas outside of the basement and ground floors.

Expert legal advice on commercial property matters

If you are a tenant or considering a lease on part of a building and need guidance, our commercial property team can help. 

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