Sharing economy and short terms lets: Another Airbnb breach

Terrace houses Print publication

13/06/2018

Walker Morris’ Housing Litigation & Management Partner, Karl Anders, provides up to date practical advice for property owners and lenders following further ‘Airbnb’ litigation.

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 saves money by not having to purchase itself or to rent elsewhere from a more expensive supplier [1].  Whilst this might, at first glance, appear to be a ‘win win’ scenario for the owner and renter alike, the sharing economy can involve some controversial elements.  In 2016 we reported on the case of Nemcova v Fairfield Rents Ltd [1], which highlighted legal and practical issues arising from the Airbnb short-term holiday/business lets model.

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, 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”.

Following a strict contractual interpretation exercise, the Upper Tribunal (Lands Chamber) (UT) held that, whilst the lease 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), it did nevertheless 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 was not use as a private residence and so it constituted a breach of the lease.  Ms Nemcova’s lease was, therefore, vulnerable to forfeiture.

Another Airbnb breach

Walker Morris is seeing an increased awareness on the part of landlords in respect of Airbnb user, along with an increased appetite to pursue enforcement of lease covenants if the leaseholder/borrower fails to remedy the breach.

The issue has come before the courts again recently, in the case of Bermondsey Exchange Freeholders Ltd v Ninos Koumetto (trustee in bankruptcy of Kevin Geoghehan Conway) [2], which was heard on 1 May 2018.

In that case the leasehold owner, Mr Conway, let out his flat via Airbnb and similar sharing economy websites. The landlord was a company in which all of the flat owners in the building held a share (a common arrangement in many multi-let residential properties).  The landlord company (i.e. the other flat owners in the building) was concerned that Mr Conway’s short-term lets could lead to nuisance, security issues and have a detrimental impact on the sense of community within the building.

Unlike in the Nemcova case (where the landlord sought forfeiture/repossession), the landlord in this case sought an injunction to restrain Mr Conway from using the flat for Airbnb-type lets.  A District Judge in the County Court and then His Honour Judge Luba QC on appeal both found for the landlord and awarded the requested injunction.

The injunction was also endorsed with a ‘penal notice’ i.e. to make it clear that if Mr Conway failed to comply, he would be in contempt of court and could face a fine, imprisonment or seizure of assets.  In the Conway case the appeal judge confirmed that:

  • Airbnb-type lettings amounted to a breach of a lease covenant which prohibits subletting or licensing or sharing or parting with possession or permitting any company or person to occupy except by means of an assignment or underletting with landlord’s consent (the Prohibition)
  • use of the flat for such lettings was not residential use, but use for commercial hire, which amounted to a breach of the residential user covenant [3].

(The argument was not raised in this case, but it is possible that Mr Conway’s use might also have amounted to a breach of planning laws applicable to the property, and therefore also a breach the compliance with laws covenant in his lease.)

Although every case will turn on its own individual facts and the wording of the particular lease covenants, this case is significant because: the Prohibition is a clause which is often found in residential leases. In addition, the designation of this type of user as commercial rather than residential will have a wide reaching effect due to the frequency of residential user clauses in such leases.

Practical advice

The Conway and the Nemcova cases together demonstrate both an increasing awareness on the part of landlords to the fact that Airbnb/sharing economy lets are likely to be unlawful and a willingness on the part of the courts to enforce covenants to prevent such use.  Whether that enforcement takes the form of an injunction or (perhaps of even more concern) the pursuit of forfeiture and repossession, is likely to depend on the individual landlord’s preference.

Loss of the leasehold asset is obviously of paramount concern for any leaseholder, but it is also a real issue for lenders who risk 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:
    • not to be used for trade or business;not to cause or permit any nuisance;the compliance with laws provision (especially any compliance with planning laws provision)
    • not to sublet or otherwise share or part with possession (other than by way of a permitted assured shorthold tenancy and/or with the landlord’s consent)
    • 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)
    • to be used as a private residence only
  • an unlawful subletting could leave the host vulnerable to complaints; compensation claims; injunctive sanctions; payment of landlord’s costs; loss of their asset as a result of lease forfeiture or breach of mortgage conditions; void 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 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 sanctions if occupiers do not pay or vacate the premises when they should [4].

WM Comment

We are seeing more cases of this nature arising. 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, the best advice is to contact a Housing Litigation expert, who will be able to explain your options and to help you protect your interests.

For further information or advice, please contact Karl Anders or any member of Walker Morris’ Housing Litigation & Management Department.

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[1] [2016] UKUT 303 (LC)
[2] 1 May 2018, Unreported – judgment can be accessed here (scroll down – p. 1 is blank, judgment begins on p. 2)
[3] which, in this case, read “Not to use or permit the use of the Demised Premises or any part thereof otherwise than as a residential flat with the occupation of one family only”
[4] for example, the Criminal Law Act 1977 and the Protection from Eviction Act 1977 could come into play here

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