To be or not to bnb

The number of serviced apartments, Airbnb lettings and other short-term lettings is increasing in London and other cities. These often utilise apartments in residential blocks, where the apartment owners are investors who have acquired the property on a long lease specifically to rent out on a short-term basis, either directly to the end occupiers or by underletting their property to a serviced apartment operator who will then enter into short-term lets. However, whether or not such lettings are lawful or whether they breach any covenants restricting the property’s use or alienation is often overlooked by individual investors, particularly when listing for short-term lettings.

The worst-case scenario would be the risk of forfeiture by the landlord

Such owners and serviced apartment operators should be aware of the specific terms of the long lease of the apartment. A very common restriction in such leases – to use the apartment as a private residence only – has now been held by the Upper Tribunal to prohibit short-term lets (Iveta Nemcova v Fairfield Rents Ltd [2016] UKUT 303 (LC)). This now gives disgruntled neighbours, disturbed by the disruption caused by short-term occupants, and head landlords looking to prevent such use (or to secure a premium for varying the lease) a clear argument for the use being in breach of the lease. In this case, the main cause for concern was the transient nature of the sub-lets. The decision confirmed that a longer-term sub-letting would have been deemed compliant, although ‘longer term’ was not specifically defined. The Upper Tribunal confirmed that its ruling on this case and its application to other leases is dependent solely on the wording of the restriction on use in the relevant lease and the particular factual context. However, the ramifications of the ruling are significant, as it clearly indicates that short-term lettings, for days or weeks, will automatically breach such a restrictive covenant. The worst-case scenario would be the risk of forfeiture by the landlord (if available under the lease). This reinforces the importance of seeking specialist advice in respect of the wording of covenants in a lease, before listing on short-term letting sites.

A further potential problem is the permitted use for the purposes of the planning acts. A private residence is a class C3 use, and leases often permit use for C3 purposes only, or at least include an obligation on the tenant not to breach planning laws. Use as serviced apartments or short-term lets is being challenged by some local authorities, on the basis that it is a C1 use, not C3. In London, it used to be the case that residents who wished to rent out their homes for no more than 90 consecutive nights had to apply for planning permission, because it would mean a change of use of their property (under the Greater London Council (General Powers) Act 1973). A failure to obtain permission risked a fine. A relaxation of the rules now means that Londoners renting out their homes for up to 90 consecutive nights no longer have to obtain planning permission. Nevertheless, the government’s policy does not provide for new opportunities for short-term use on a permanent or commercial basis. As at present, property owners will still have to seek planning permission if they wish to change the use of premises, for example from a C3 to a C1 use. From 1 January 2017, Airbnb introduced a new and automated 90-day limit, unless hosts confirm that they have the planning permission to share their space for a longer period of time.

Leaseholders who have mortgaged their property need to ensure that they do not, by sub-letting, breach the terms of their mortgage, as most residential mortgages prohibit commercial use and/or sub-letting without the lender’s consent. Additionally, most home insurance policies will not cover the use of the property under a short-term let, further risking the terms of the mortgage being breached.

Action points

• If you are a leaseholder considering short-term sub-letting, check the lease for a private residence-only restriction, and also for other covenants that might prevent such use, such as a prohibition on letting for short periods or against uses other than a C3 use class. Seek specialist advice and/or the consent of the landlord where necessary. If you are acquiring a lease with the intention of granting short-term lets, negotiate provisions that allow this use. If you have a mortgage, review your mortgage documents; unless it is a buy-to-let mortgage, its terms and conditions are likely to prevent sub-letting without consent. Check the building insurance policy; short-term lets may invalidate it.
• If you are granting an assured shorthold tenancy agreement, ensure that the prohibition on alienation is as strict as possible, with absolute prohibition of any sharing or parting with possession of any part or the whole of the property concerned.
• If, as a leaseholder, you are looking to grant an underlease to a serviced apartment operator, and the head lease contains provisions that might prevent short-term lets, agree with the operator who will take the risk of enforcement action and what will happen if the use is successfully challenged (for instance, whether either party may terminate the lease).