1. The beginning of 2016 has seen much focus on the buy to let market with the changes to the tax implications for those purchasers who already own property. The Government has announced further changes to come for buy to let landlords – might budding landlords seek to overcome these changes by exploring opportunities for shorter lets of their own homes, or alternatively, rooms in their own homes?
2. In the current climate of what has become known as the “sharing economy” (owners renting out something they are not using such as a house or a car), short-term lettings of homes, can be an attractive and lucrative option for homeowners. With more and more people looking use technology to help them to get value for money, together with many trying to improve their financial situation by making money out of what they already own, the short-term lettings concept has really taken hold.
3. How then, do “landlords” (or hosts) and indeed tenants get the most out of these arrangements and best avoid pitfalls? This article will seek to highlight some of the less obvious issues of which parties to these arrangements ought to be aware.
4. It has been widely reported in the press that would be landlords or “hosts” who have used online lettings platforms have found that insurance (or indeed the lack of it) can be a real issue where the tenant causes damage to the property, or where valuable items go missing.
5. It is important to check that any insurance in place is appropriate to meet the circumstances of the occupancy. Standard household insurance policies may exclude liability where a third party is in possession of the premises, or the property is being “let out”. Those seeking to let their property out, even if only for a night or two, may need to consider specific landlord’s insurance.
6. Clearly, both parties to the letting arrangement will have an interest in ensuring that there is adequate cover in place to provide protection if something goes wrong; both would want to avoid any personal liability should damage to the property arise. However, a recent case has highlighted the importance that can attach to the particular insurance covenants in a tenancy or occupancy agreement. Before simply adopting the standard form of insurance covenant it is worth taking some time to consider the consequences of the insurance covenant in the event of the occurrence of an insured risk. The consequential impact of other covenants in the lease ought also to be considered.
7. In the case of Fresca-Judd v Golovina (QBD, 5 February 2016) the court considered whether the tenant in question was entitled to benefit from her landlord’s property insurance. The The landlord (F) had granted to the tenant (G), a tenancy of a cottage in Wiltshire for 18 months. G took up occupation not long before Christmas, but returned to London before the New Year, leaving the property vacant. In her absence a maintenance contractor attending the property on behalf of F discovered that a pipe had burst causing extensive flooding damage. F had covenanted in the tenancy agreement to arrange insurance for the property and was duly compensated by her insurers. The main dispute between the parties arose when F’s insurers sought to bring a subrogated claim against G. They alleged that (in breach of an express term in the lease, or alternatively negligently) G had switched off the heating before vacating and that she was in any event liable to compensate the insurers to the tune of over £100,000.
8. Counsel for G argued successfully that notwithstanding the absence of any obligation on the part of G to contribute to the insurance premium, the obligation of F to insure the property could only sensibly be interpreted as existing for the joint benefit of both parties. On a proper construction of the agreement, the parties had to be taken to have agreed that F would look to the insurers for compensation rather than to G; and insurers exercising rights of subrogation could not be in a better position than F.
9. This principle can have particular relevance to short term lettings. Agreements for longer periods tend to calculate the rent and insurance rent separately. This tends to be because the insurance rent will vary over a longer period. Generally speaking, where a landlord is required for example, to repair and to insure (as in this case), this will directly impact upon the rent payable. Where however there is no separate calculation for insurance rent, or, as in this case, the agreement requires the tenant to pay for any increase in the insurance rent over time, this will lend weight to the conclusion that the tenant is in fact paying towards the insurance as part and parcel of the rental payment.
10. It could also be argued that if an agreement requires the landlord to put insurance in place, yet the tenant cannot benefit from that insurance then the cover would be of little use. If it were otherwise, tenants would routinely require their own insurance to cover the same risks as a landlord under a short-term let.
11. One authority that was considered in Fresca-Judd v Golovina, which could be said supports this contention is that of Barras v Hamilton (1994) SLT 949. Counsel for G relied on the following passage in support of his client’s defence:
“ But if a landlord obliges himself, in a mutual contract with the tenant, to insure the subjects, that obligation, in which the tenant is the contractual creditor, must in my opinion be regarded as having been undertaken in the tenant's interests, in return for the mutual obligations undertaken by the tenant. That the obligation to insure is undertaken in the tenant's interests is perhaps particularly clear, where the tenant himself undertakes a specific obligation to the landlord to pay the cost of that insurance.
If one concentrates upon the fact that effecting insurance of the subjects is a contractual obligation, enforceable against the landlord by the tenant, I can see no reasonable alternative to the conclusion that as between the landlord and the tenant, the landlord is accepting that the tenant need not himself insure the subjects, and will not be liable to the landlord for any loss or damage suffered by the landlord which falls within the scope of the agreed insurance. If the landlord has in fact underinsured, that will be a matter for him. But having agreed to insure the subjects, he is bound, in my opinion, in a question with the tenant, to bear those risks covered by the insurance in question, with no recourse against the tenant for any lessor damage falling within the scope of the insurance cover.” (Lord Prosser at p.956C)
12. Notwithstanding the above, there is no conclusive presumption that where a landlord is obliged to insure, it will always be for the benefit of the tenant (Lambert v Keymood Ltd  Vol.1 LLR 90). The insurance covenant read together with the other covenants setting out the tenants’ obligations, will determine whether the tenant can indeed rely on insurance obtained by the landlord. It remains a matter to be determined on a case by case basis.
13. That there would be any need to check the requirements for planning permission prior to letting out one’s own home for a few nights is unlikely to top the list of things homeowners consider before making their property available for short term lettings. In London however, prior to May 2015 when the law changed, those wanting to let out their homes on a short-term basis were required to have the appropriate planning permission in place. This was due to the Greater London Council (General Powers) Act 1973, which provided that short term lettings of less than 90 days in length, involved a material change of use for which permission was required. It is understood that this law was rarely enforced.
14. Section 44 of the Deregulation Act 2015 has amended this. Now homeowners in Greater London are free to provide short term lettings of their properties without needing to seek permission from the authorities and without breaching planning rules, provided that the total number of days does not exceed 90 in the calendar year and that the home owner remains liable for the payment of council tax at the property. Under the old legislation there were difficulties with regards to enforcement of the law and these difficulties are likely to persist under the new regime. How is a local authority to keep tabs on whether I, my neighbour or anyone for that matter, has contravened the 90 day cap? Nevertheless, homeowners ought at least to be aware of the risk of a contravention of local laws and ought to manage that risk accordingly.
The landlord’s/homeowner’s risk of breaching other obligations
15. Prior to any letting, including a short-term letting, landlords ought also to give consideration to the question of whether they are required to give notice to and/or obtain relevant consents from any superior landlord, or any mortgagee. Being found to be in breach of covenants under a mortgage deed or a lease could have serious consequences for a landlord, which could quickly outweigh any benefit sought to be derived from a short-term let.
16. The safest thing is for these documents to be checked; if in doubt seek legal advice as it could save money in the long run.
17. Tax: The tax implications of buy to let and of short-term letting arrangements are much too extensive to be dealt with within the confines of this article. HMRC offers a good deal of information on its website. Landlords/hosts ought to consider what the consequences of this additional source of income are and what obligations (or indeed benefits) may arise in light of it. Again, it may be worth seeking specialist advice.
18. Security: The considerations in relation to insured risks have been dealt with above. Homeowners in particular should spend some time thinking about where any valuable items might best be stored safely.
19. Standards and Health & Safety: Short-term lets of people’s homes can certainly be more cost effective than staying in a hotel for example, but who do tenants turn to if/when something goes wrong and what rights do the tenants have to return keys; demand a refund etc.? These are questions that should be answered prior to the beginning of any letting. It pays to know exactly who any contract is with and who will be the point of contact in the event that something goes wrong.
20. Short-term lettings can be a convenient and cost effective exercise for all parties involved. However, as with any property transaction, it is not an arrangement to enter into lightly. It pays to invest the time to ensure that any arrangement is supported by a written agreement which has been tailored to meet the needs of the parties involved and that the relevant issues, such as those that have been discussed above are considered and appropriate steps taken to address them.
This material was first published by Sweet and Maxwell Limited in The Landlord and Tenant Review, Volume 20, Issue 2 and is reproduced by agreement with the Publishers.