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D.L.G. & Associates Ltd. v. Minto Properties Inc., 2014 ONSC 7287 (CanLII), a decision of Justice Paul Perell, raises some questions as to how far-reaching are the effects of a covenant to insure between landlord and tenant. Justice Perell considered whether a covenant to insure by a commercial tenant precluded a damages claim by that tenant, based upon misrepresentations said to have been made by the landlord, that induced the tenant to enter into the lease.

On a Rule 21 motion, Justice Perell gave effect to the covenant to insure and dismissed most of the tenant’s claims. The tenant was permitted to proceed with a claim for fraudulent misrepresentation as that was held by Justice Perell not to be affected by the covenant to insure.

There are a couple of things that are interesting about this decision. First, it was not a claim by the tenant for the actual cost of repairing the damage occasioned by the event for which it was supposed to be insured (or at least, not only that type of claim) that was found by Perell J. to have been barred by the covenant to insure. Rather, it was a more general claim which had alleged that the lease itself (in which the covenant was contained) was not valid because of misrepresentation by the landlord.

Secondly, the tenant’s insurer revoked its coverage after the first of two sewer backups. The landlord accepted this revocation and agreed that the tenancy could continue with the reduced coverage. Yet, after the second sewer backup, by which time coverage for that risk had ended, the landlord was still allowed to rely on the covenant to insure to defeat the tenant’s claim.

It seems to me that both of these findings are problematic.

I can’t do a better job than Justice Perell did in summarizing the facts succinctly:

[2]               DLG, which operated a franchised restaurant, is a former commercial tenant of Minto. In this action, DLG alleges that it was induced to enter into its lease because of Minto’s fraudulent misrepresentations about the state of the plumbing in Minto’s mixed residential and commercial complex.

[3]               In essence, DLG says that Minto lied that there had been no problems about sewer back-ups affecting the leased premises in the complex and then it lied again about taking steps to remediate the problems. DLG alleges that it was induced to enter into the lease and then Minto recklessly breached its obligation to correct the known plumbing problems and that as a result, there were two sewer back-ups that put DLG out of business. DLG sues Minto and advances claims of breach of contract, negligence, negligent misrepresentation, and fraudulent misrepresentation.

Minto moved to have DLG’s claim struck out and the action dismissed. While it advanced several arguments, the one that I am focusing on in this post was the principal one: that DLG’s claims were barred by the covenant to insure, contained in the lease with Minto.

That covenant, contained in paragraph 7.1(a) of the lease, was quite comprehensive. Among several types of insurance that DLG was required to obtain was “‘All Risks’ (including fire, extended coverage, flood, sewer backup and earthquake) property insurance”.

In its action against Minto, DLG alleged that Minto had misled it about prior instances of plumbing failures and sewer backups when the lease was being negotiated and that those misrepresentations by Minto had induced DLG to enter into the lease, which it otherwise would not have done.

On October 6, 2011, about three months after DLG had taken possession, the sewer backed up. The plumbing system in the premises turned out not to have met the Building Code standards.

Minto paid for the cost of the clean-up and reconstruction (although in the litigation, it characterized this as a “gratuitous” payment).

Significantly (to my mind, at least), Justice Perell said this:

After the sewer back-up, DLG’s insurer revoked coverage for flood and sewer back-up damages. Minto acknowledged the cancellation and accepted the continuation of DLG’s lease  with the correspondingly reduced coverage. [Emphasis added]

After the October, 2011 sewer backup, Minto had received advice to install a backflow preventor in the plumbing system. Justice Perell said that “Minto promised to implement these recommendations, and DLG relied on the promise. Minto, however, did not implement the recommendations, and on September 6, 2012, there was a second sewer back-up.”

Following this second sewer backup (which again required DLG to close for an extended period), DLG’s franchisor terminated its franchise. Shortly afterwards, DLG notified Minto that it (DLG) was treating the lease as terminated and relied on what it claimed were Minto’s fundamental breach and repudiation of the lease agreement.

Minto rejected DLG’s position and itself terminated the lease for non-payment of rent.

So far as I can see, from the passages in the statement of claim that were quoted in the judgment, the ensuing lawsuit by DLG alleged that Minto had induced DLG to enter into the lease by misrepresenting the plumbing history of the premises. DLG was looking to have the lease set aside and it claimed damages of various sorts. The reasons do not specifically say whether there was any claim for the losses that DLG experienced as a direct result of the first or the second sewer backups. To me, the presence or absence of such a claim or claims would be an important fact.

Justice Perell concluded that DLG’s claims for breach of contract, negligence, and negligent misrepresentation were precluded by the covenant to insure. He allowed the claim for fraudulent misrepresentation to continue. It is his analysis of the effect of a covenant to insure on which I wish to focus.

His Honour  began his analysis by looking at the three Supreme Court of Canada cases that are undoubtedly the cornerstones of the law in this area: Cummer-Yonge Investments Ltd. v. Agnew-Surpass Shoe Stores Ltd., 1975 CanLII 26 (SCC), [1975] 55 D.L.R. (3d) 676 (S.C.C.); (2) Pyrotech Products Ltd. v. Ross Southward Tire Ltd., 1975 CanLII 25 (SCC), [1975] 57 D.L.R. (3d) 248 (S.C.C.); and (3) Smith v. T. Eaton Co., 1977 CanLII 39 (SCC), [1977] 92 D.L.R. (3d) 425 (S.C.C.).

His Honour said that “[t]he effect of these cases is that if a contracting party covenants to obtain insurance, then that party must look to the insurance and he or she may not sue the other contracting party for damages for the insured risk or for the risk that ought to have been insured.” I agree with that characterization of these decisions.

Justice Perell also looked at more contemporary authorities, such as Madison Developments Ltd. v. Plan Electric Co. (1997), 1997 CanLII 1277 (ON CA), 36 O.R. (3d) 80 (C.A.) and others, but they merely reinforced the principles laid down by the Supreme Court trilogy.

His Honour then applied that law to this case:

Applying the above authorities to the assumed to be true facts of the case at bar, I conclude that it is plain and obvious that DLG’s claims for breach of contract, negligence, and negligent misrepresentation cannot succeed and are barred by the covenant to insure.

This is the first of the two points with which I have some difficulty. The cases say that a covenant to insure amounts to “an assumption by that party [the one giving the covenant] of the risk of loss or damage caused by the peril to be insured against” [emphasis added]. (Quoted from Sanofi Pasteur Ltd. v. UPS SCS Inc., 2014 ONSC 2695 (CanLII))

How can it be said that by entering into covenant to insure, DLG assumed the risk that it had been induced to enter the lease by Minto’s negligent misinterpretation? That was not the “peril to be insured against”.

I can certainly see how a claim for damages consequent upon the October, 2011 sewer backup would have been foreclosed by the covenant to insure (leaving aside the more fundamental question of whether the lease was valid in the first place). DLG agreed to obtain insurance against losses resulting from the peril of sewer backup so when just such a loss materialized, that is a risk that it could legitimately be said to have assumed. That is exactly how covenants to insure are supposed to operate: they transfer to the party giving the covenant the risk occasioned by the peril to be insured against.

But it seems to me that it is a much more sweeping conclusion to say that the covenant to insure prevents DLG from even challenging the validity of the lease. I don’t see how one relates to the other. What insurance coverage could DLG have looked to for redress in relation to its central claim: that Minto’s misrepresentation invalidated the lease?

Then, there is the other question: the effect of the covenant to insure on the second sewer backup, by which time DLG had lost its insurance against that risk. Before Perell J., DLG argued that Minto could not rely on the covenant to insure in relation to the second sewer backup. It relied on principles of “acquiescence, waiver, and equitable or promissory estoppel”. However, Justice Perell rejected those arguments, saying that “I, however, do not see how these equitable principles can be found to apply based on the pleaded facts.”

(To me, the situation is simpler. If Minto agreed to continue the lease after DLG’s insurance coverage was reduced, why would this not have amounted to a variation of the terms of the lease agreement itself, agreed to by both parties? Viewed in this way, there would be no need to engage cost equitable principles. The issue would be a straight matter of contractual interpretation: there was no longer a covenant to insure against the risk of loss resulting from the peril of sewer backup by the time of the second loss.)

I do agree with Justice Perell, that the change in DLG’s insurance after the first loss would not have affected its position in relation to that loss, when the covenant to insure and the sewer backup insurance were still in place. But, as outlined above, I do not see how even at that point, the covenant to insure could possibly have defeated a claim for damages based on DLG having been induced to enter into the lease by Minto’s negligent misrepresentation.

Justice Perell also considered an argument by DLG, that the covenant to insure was an exculpatory provision rendered unenforceable by the Supreme Court’s decision in Tercon Contractors Ltd. v. British Columbia (Minister of Transportation and Highways), [2012] 1 S.C.R. 69. He rejected this argument but I have not summarized it here, as it was principally the “covenant to insure” issue that I was interested in.


Source: http://www.cavanagh.ca/blog/


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