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Sharing economy and short-term lets: Airbnb case highlights risks for landowners and lenders

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22/12/2016

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 that 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.  For example, Uber, which operates a taxi service on this collaborative consumption basis, has faced legal action over the status of its drivers (and whether they are actually employees entitled to statutory employment protections).  The recent case of Nemcova v Fairfield Rents Ltd [2] has highlighted legal and practical issues arising from the Airbnb short-term holiday/business lets model.

Facts

Ms Nemcova owned a 99 year lease of a 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 (of days/weeks rather than of months).  Ms Nemcova’s lease did not contain any relevant prohibitions against sub-letting, short-term letting, holiday letting, business or commercial use and neither did it require that she occupied the flat herself or as her principal residence.  Ms Nemcova therefore resisted her landlord’s [3] 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 question fell to be determined on appeal to the Upper Tribunal (Lands Chamber) (the UT).

Law

Applying the leading modern authority on the construction of contracts, Arnold v Britton [4], the UT considered the ordinary, natural meaning of the covenant in question, taking into account the documentary, factual and commercial context in which the lease had been entered into.  That context included both the fact that the covenant was in place in part for the protection of other leaseholders in the building; and the intended nature of the landlord and tenant relationship.

Decision

The UT held that whilst the covenant did not require that the flat be used as the private residence of the lessee or any occupier (as a person may have more than one private residence at any one time), nevertheless the covenant did require that the occupier for the time being must use the flat as his or her private residence.  The UT decided that that is not the case when a person occupies for a matter of a few days only, and that Ms Nemcova’s short-term business/holiday lets were therefore in breach of her lease.

Significance and practical advice

Every case will turn on its own facts and, in particular, on the wording of any particular lease covenant or other relevant contractual provision. However this case is significant because of its characterisation of Airbnb-type lets as not amounting to private residential occupation.  A great many residential leases which do not expressly prohibit short-term letting do, however, contain a prohibition against use other than a private residence.  Following this case, Airbnb-type short-term lets are likely to constitute a breach, leaving all such leases vulnerable to forfeiture.

The sharing economy has (perhaps somewhat ironically) become big business and it is, no doubt, here to stay. Landowners, whether they be freehold owners or leasehold tenants themselves, and mortgage lenders would therefore be well advised to 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
  • 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 letting being unlawful
  • an unlawful letting 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 and 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 [5].

WM Comment

As the sharing economy continues to proliferate, we can expect the legal issues highlighted above to increasingly come to the attention of the general public. For some, the lessons learned could be costly. If you have any queries or would like any advice, please do not hesitate to contact Karl Anders or any member of Walker Morris’ Housing Litigation and Management team.

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[1] This phenomenon is also often referred to as collaborative consumption
[2] [2016] UKUT 303 (LC)
[3] The landlord was the freehold owner
[4] See our earlier briefing for further information on this important case
[5] for example, the Criminal Law Act 1977 and the Protection from Eviction Act 1977 could come into play here

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