Using airbnb or other online reservation sites to rent out a leasehold property for short periods can be problematic as this may be a breach of the lease terms. It also has implications for mortgage lenders.

Increasing numbers of people are using digital platforms, such as airbnb, to advertise their properties for short term stays. However, this has also created issues from a legal perspective, as illustrated by the case of Nemcova v Fairfield Rents Ltd late last year. The case has received significant attention because the Upper Tribunal found that Ms Nemcova was in breach of her lease by allowing the property to be advertised on airbnb and used for short term stays.

The case continues to be on the radar, particularly for mortgage lenders, because a successful forfeiture of the lease by the landlord could leave them exposed with a large debt owed and no security.

In this note, we recap with a summary of the case, highlight why it is important for mortgage lenders and finally, provide some practical considerations for lenders.

Background

Ms Nemcova was the owner of a long leasehold interest in a London flat and resided there, but occasionally rented out the property for short periods through airbnb and TripAdvisor when she was not in London. Her lease contained a covenant that the flat only be used as a private residential premise. Her landlord claimed that by letting the property to business travellers and holiday makers on a series of occasional short term lets did not constitute use as a "private residence" and therefore that she was in breach of her obligations under the lease – an airbnb guest will more often than not be using the flat like a hotel for a weekend break and not as their private residence.

The Upper Tribunal agreed with the landlord and found that this restriction on use prohibited renting the property out on short term holiday lets. The Upper Tribunal decided that the definition of private residence depended on a variety of factors but more importantly, it depended on the nature and duration of the occupation.

The key point of the Tribunal's decision was that the occupation of the flat by each of the short term guests lacked sufficient permanency to be considered occupation of the flat as a "private residence”.

Significance of the decision

The decision is significant, because such restrictions on use other than as a private residence or dwelling house are fairly standard and found in many leases although the Upper Tribunal said that the decision was sensitive to the particular facts.

As such, the case does not establish that every airbnb short let will amount to a breach of lease but it suggests that, depending on the particular wording of a restriction on use (if any) contained in the lease, a tenant who lets premises out for short periods may be in breach of their lease.

Impact of breach of lease on mortgage lenders

If found in breach of the lease, the mortgagee's security is at risk, because the landlord can apply to have the lease forfeited. If this happens, the rights in the property will revert to the freeholder/landlord. The mortgage lender will be left with a large mortgage debt which is no longer secured.

Practical considerations for mortgage lenders

To protect themselves, one approach is to consider the reason for forfeiture and if it relates to unpaid fees or charges or other amounts due under the lease, the lender can make this payment to the freeholder to remedy the breach and stop the forfeiture proceedings. In most cases the lender is likely to then add that amount to the mortgage as arrears.

Where the breach is of a different/non-financial covenant, such as in the Nemcova Case, the approach for mortgage lenders is likely to vary depending on the facts of the case and the covenant which has been breached. They are likely to have fewer options to reduce the risk of forfeiture where the breach cannot be easily remedied (by them).

The lender could, in such cases, apply for relief from forfeiture to preserve its security over leasehold title, but this is likely to take time, resources and the outcome is not guaranteed.

Lenders should consider making specific inquiries about their customer's intended use of the property when requests are made to convert to a buy to let product or otherwise sub-let the property. Potentially this could also be picked up under the CML handbook – leading to more detailed enquiries.

Many home insurance policies do not cover the use of the property under a short term sub-let such as via airbnb which means the mortgagor is likely to be in breach of the mortgage (through failure to maintain adequate insurance at all times) which an additional point for mortgage lenders to consider.

So, how concerned should lenders be about their security? The lease forfeiture process is detailed and takes time – there are a number of requirements that the landlord must satisfy. In practice, and given the Nemcova decision, we would expect that the majority of leaseholders, if requested to stop offering their property for short term stays on sites like airbnb by their landlord or management company, will comply. However, it is still important for mortgage lenders to be aware of the risks involved if their customers are intending to use sites like airbnb.