With over 80,000 British homeowners already trying to boost their income by advertising their properties on short term rental websites such as Airbnb, and with numbers expected to rise significantly over the next year, the recent case of Nemcova v Fairfield Rents Limited [2016] UKUT 303 sends a warning shot to the short stay rental market that such lettings could land them in hot water with their landlord.

Background

The case of Nemcova v Fairfield Rents Limited involved a long leasehold flat in London. Although the lease did not contain any restrictions on subletting it did contain a covenant that the flat could not be used for any illegal or immoral purpose or any purpose whatsoever other than as “a private residence”. Ms Nemcova advertised the flat on the short term rental platform, Airbnb, and a series of short term lettings had been entered into, mainly with business men working in London. Ms Nemcova did stay in the property herself from time to time and paid all council tax and utility bills. The freeholder of Ms Nemcova’s block of flats argued that by letting the flat on Airbnb, Ms Nemcova was in breach of the covenants not to use the flat other than as “a private residence”.

Decision

The Upper Tribunal stated that there must be a degree of permanence for the property to be used as a private residence and this would require the occupier living in the property for more than a few nights of the week or for a weekend. It could not be said that where an occupier stays in the property for a matter of days, and then leaves, they were using it as their private residence. The problem was that the occupation was transient and the occupier was using the property in the same way as they would use a hotel room. As such, the Upper Tribunal decided that the tenant had breached the user covenant in the lease by allowing the short stays.

Practical Considerations

  • As with any case involving interpretation of a legal document, the Upper Tribunal stressed that the case turned on its facts and the precise wording of the lease. However, the decision may assist landlords and managing agents who are receiving complaints from residents of their building about Airbnb lettings that are happening on their doorstep (especially in London following a relaxation of rules which mean Londoners renting out their homes for less than 90 consecutive nights no longer have to apply for planning permission). Any landlord who finds themselves in this position should carefully review the terms of the lease. This case sets a precedent that the landlord could take enforcement action against the tenant, with the ultimate sanction being that it can obtain possession of the property via forfeiture of the lease. Even if there is no user clause restricting the use of the property to a private residence, the practice could, in certain circumstances, be in breach of the subletting provisions of the lease or any covenant against using the premises for business purposes. The landlord may, depending on the terms of the other leases, even be able recover the costs of enforcement action from the other leaseholders.
  • Developers who are selling residential flats off plan and want to avoid potential purchasers being put off by the thought that they may have transient neighbours, might wish to consider including additional covenants in the new leases that prevent the property from being underlet for short periods of time.
  • From a leaseholder’s perspective, the case puts another obstacle in the way of deriving an income stream from the short stay rental market. Not only could the letting be an invalidation of the terms of their mortgage (meaning that, in the worst case scenario the lender could ask for a full repayment of the loan) and a breach of the terms of their insurance policy (meaning that claims, even unrelated to Airbnb lettings, could be refused), such type of lettings could be a breach of the user clause in their lease which is capable of being enforced by the landlord. This is in addition to the “red tape” which needs to be adhered to, such as compliance with health and safety legislation and declaring the rental income to HMRC. It is worth bearing in mind that the government’s £1,000 tax break for Airbnb landlords announced in last April’s budget does not come into force until April 2017 and so, for the time being, any income from Airbnb type lettings needs to be declared.