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Sharing economy and short-term lets after Airbnb

To Let sign Print publication

05/07/2017

As the sharing economy proliferates, Karl Anders provides up to date practical advice for landowners and lenders following last year’s Airbnb case.

The sharing economy

In the so-called sharing economy, owners (who are often individuals or small businesses) rent out to others something that they are not using themselves, usually via a third party website which operates a rating or review system. The idea is that the owner generates some income from its otherwise unused asset and the renter also saves money by not having to rent elsewhere from a more expensive traditional supplier.  As we have reported previously, however, the 2016 case of Nemcova v Fairfield Rents Ltd [1] highlighted legal and practical issues arising from the Airbnb short-term holiday/business lets model.

Airbnb – a reminder

Ms Nemcova owned a leasehold flat in London. She was often absent herself and so, using a sharing economy reservation website, she advertised and let out her flat several times on a number of very short-term lets.  Ms Nemcova’s lease did not contain any relevant prohibitions against sub-letting, short-term letting, holiday letting, business or commercial use and nor did it require that she occupied the flat herself or as her principal residence.  Ms Nemcova therefore resisted her landlord’s assertion (made as a pre-cursor to a claim for possession via forfeiture of the lease), that she was in breach of her covenant not to use the flat for any purpose whatsoever other than “as a private residence”.

The Upper Tribunal (Lands Chamber) (UT) held that whilst the covenant did not require that the flat be used as the private residence of the leaseholder or any occupier (as a person may have more than one private residence at any one time), nevertheless it did require that the occupier for the time being must use the flat as his or her private residence.  The UT decided that when a person occupied for a matter of a few days only (such as during short-term business/holiday lets) that constituted a breach of the lease.  Ms Nemcova’s lease was, therefore, vulnerable to forfeiture.

Up to date advice

Walker Morris is seeing an increased awareness of the Airbnb issue on the part of landlords, along with an increased appetite to seek enforcement of lease covenants, which will culminate in forfeiture action (and the landlord’s recovery of possession) if the leaseholder/borrower fails to remedy the breach. Loss of the leasehold asset is obviously a concern for any leaseholder, but it is also a significant concern for lenders who face losing their security.

Landlords, tenants, lenders and legal representatives alike should note the following traps and tips.

  • Freehold deeds; leases; residential letting/management regulations; mortgage conditions; home insurance policies; planning laws, residential letting legislation and the terms of and conditions of sharing economy reservation services are all likely to contain covenants and requirements that are likely to impact upon a party’s ability to lawfully proceed with an Airbnb-type letting.
  • Lease covenants to watch out for, in particular, include:
    • to be used as a private residence only (as per the Nemcova/Airbnb case);
    • not to be used for trade or business;
    • to maintain adequate insurance at all times (this covenant will be breached if the relevant home insurance policy does not cover use of the property under a short-term let);
    • not to cause or permit any nuisance;
    • not to sublet (other than by way of an assured shorthold tenancy and/or with the landlord’s consent);
    • the compliance with laws provision (especially any compliance with planning laws provision).
  • A failure to consult and comply with all relevant commercial, contractual and statutory provisions (including a failure to make any necessary notifications to lenders and insurers and to obtain any necessary consents), could result in a short term letting being unlawful.
  • An unlawful subletting could leave the host vulnerable to complaints; compensation claims; loss of their asset as a result of lease forfeiture or breach of mortgage conditions; voided insurance policies; and poor reviewer ratings and/or removal from the letting platform. .
  • A failure to properly consider and manage all risks associated with high occupier turn-over and repeated short-term lets – especially holiday lets where occupiers might not treat the property or neighbours with care and respect – could also cause nuisance for other occupiers of multi-let buildings and deterioration of the property, with high repair and maintenance costs.
  • A lack of proper understanding of relevant residential lettings regulations and legislation could also mean that a host puts occupiers at risk (for example, if proper safeguards are not put in place, such as gas safety and electrical certificates) and/or could leave the host with problems or even criminal convictions when it comes to dealing with occupiers who do not necessarily pay up as they should or vacate the premises when they should [2].
  • Lenders and leasehold conveyancers may wish to consider amending their processes to enquire whether Airbnb-type lets are likely, and to adapt their approach and advice accordingly if so.

WM Comment

As mentioned above, we are seeing an increased awareness of this issue on the part of landlords, along with an appetite for them to seek enforcement of lease covenants, ultimately culminating in forfeiture action.

Whether you are a landlord concerned about the use to which your tenant is putting your property, or you are a lender who feels on the ‘back foot’ as your security is threatened by your borrower’s breach, please do not hesitate to contact Karl Anders or another member of the firm’s Housing Litigation and Management Department.

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[1] [2016] UKUT 303 (LC)
[2] for example, the Criminal Law Act 1977 and the Protection from Eviction Act 1977 could come into play here.

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