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Tuesday, 22 November 2016

The Sharing Economy – Beware the Pitfalls of Short-Term Letting



The short-term letting of holiday accommodation through internet sites such as Airbnb has grown exponentially in recent years.

Many have been encouraged to engage in the “sharing economy” by making their homes, or a spare room, available for holiday lets.

It's now become a hot topic for property lawyers, as short-term letting has recently come before the courts in the context of landlord and tenant law.

Although the case was not specifically concerned with Airbnb, it has prompted many in the legal world to take a closer look at the potential legal pitfalls for homeowners in letting out their homes in this way, in particular leaseholders.

As this applies to most flat owners, it will be of particular concern to those with accommodation in popular city centre locations.

And there are other issues for freeholders and leaseholders to think about too.

Airbnb’s terms and conditions say hosts must not “violate any local, state, provincial, national, or other law or regulation, or any order of a court, including, without limitation, zoning restrictions and Tax regulations”.

It’s up to the host to know what rules and regulations might apply in their country and region.

So although this blog normally only looks at commercial property law, I thought I'd take the opportunity to collate some of the main issues that have been flagged by commentators on airbnb style lettings following the recent case.

Leaseholders - Check your lease

You must check the terms of your lease to ensure it doesn’t contain provisions that prohibit short term sub-letting or use as a holiday let.

That doesn’t only mean looking at the underletting or “alienation” clauses, as seen in the recent case before the Upper Tribunal, Nemcova v Fairfield Rents Limited [2016] UKUT 303 (LC).

The Upper Tribunal ruled that a tenant (who held a 99 year lease) had breached a covenant in her lease not to use her flat other than as a private residence by granting a series of short-term lettings.

She had advertised the flat on the internet and let it to business travellers and holiday makers on a series of occasional short term lets.

There was no restriction on subletting in the lease (other than in the last 7 years of the term). What was decisive in this case was the duration of the periods of occupation by the successive occupiers, which was considered a breach of the user covenant.

In letting her flat on short term lets, it meant that the tenant’s own occupation of her flat was so transient and not sufficiently permanent that she would not consider the property her private residence.

In order for a property to be used as a private residence, there must be a degree of permanence going beyond being there for a weekend or a few nights in the week.

The occupation of the flat by each of the short term subtenants lacked sufficient permanency for it to be considered occupation of the flat “as a private residence” by them, so unless the Court of Appeal deals with this issue in future and reaches a different conclusion, we now have judicial authority that such a covenant is breached by short term or Airbnb style letting.

Arguably a longer term of subletting would have complied, but the Tribunal did not stipulate what minimum period would be required.

Each case will be fact specific. In this case, the tenant had been letting out the flat for collectively long periods of about 90 days a year. That is clearly not the same as someone who, for example, decides to let their home out for two weeks a year while they themselves are on holiday, which I assume would not have fallen foul of the use covenant in this case, although there’s no authority for this.

All the terms of the lease should be checked carefully, not just the obvious ones such as whether there are there any restrictions of sub-letting, or whether the landlord’s consent is required.

Has the landlord made any regulations that the lease says need to be complied with? If so, check they don’t prohibit or control short term lets.

Most leases will also prohibit noise nuisance. Noisy holidaying guests might put you at risk of a claim either from the landlord or other tenants in the building.

Freeholders – Check for Covenants

Check your deeds to make sure that there are no historic covenants that might prevent short lets.

Freeholders and leaseholders

There are other things to think about too, whether your home is leasehold or freehold.

Is your home mortgaged?

You need to ensure that granting holiday lets doesn’t breach the terms of your mortgage.

Mortgage terms will usually insist that the lender’s prior written consent must be obtained to any lettings, and the interest rates you agreed might only apply for as long as you occupy the property as your only or main residence. Failure to comply could lead to a demand for repayment in full or repossession of the property.

If the lender decides to give consent, it might demand a higher rate of interest in return.

Insurance

You must check your insurance to make sure it won’t be invalidated by letting out your home as a holiday let.

In leasehold flats it’s usually the freeholders’ obligation to take out insurance to cover the entire building, and the leaseholder will usually have its own contents insurance, so both policies should be checked.

A mortgage is also likely to require adequate insurance to be in place at all times.

Airbnb states on its website that it offers Host Guarantee and Host Protection Insurance, but it adds that “this does not take the place of homeowners or renters insurance or of adequate liability coverage.”

"Adequate liability coverage" should include public liability insurance. If a guest is injured or if their property is damaged while they are staying in your home, you may be held liable. Public liability insurance is designed to cover risks such as these.

Planning Law – London

In London, the Greater London Council (General Powers) Act 1973 provides that local authorities can serve enforcement notices on a property owner who has breached planning law by changing the use without planning permission. Failure to comply with an enforcement notice can result in a £20,000 fine.

Until last year this was considered to be effectively a ban on all holiday letting without specific planning permission.

Section 44 of the Deregulation Act 2015 amended the 1973 Act to allow short term letting for up to 90 days each year, as long as the host is liable for council tax.

However, local authorities may direct that the “90-day rule” exemption doesn’t apply to certain residential premises, or residential premises in certain areas.

Before letting your London property as a holiday let, you should check with your local authority first to see whether the exemption applies.

Planning – Nationwide

There may also be a planning issue for properties outside London, depending on the intensity of use.

A private residence is a Class C3 use (dwelling houses). There’s a risk that a local authority might challenge the use of your property for short-term lets on the basis that that is a C1 (hotels) use, not C3, or that a material change of use to a sui generis use has taken place.

If your property is leasehold, your lease is likely to include a covenant to comply with planning law, or may even specify C3 use, and in either case you risk being in breach.


Health and Safety

You will be obliged to comply with health and safety laws, such as fire safety and the installation of smoke alarms.

Taxation

You will need to pay any taxes that are payable on the income you receive.


It might be buried in the detailed terms and conditions of holiday let websites, but homeowners are not being adequately warned about the need to check on compliance with lease terms, mortgage terms, insurance and planning by the websites themselves, and so it’s incumbent on homeowners themselves to make sure they are fully aware.

Now landlords are learning more about the workings of the sharing economy, perhaps we can expect to see clauses creeping into residential leases that will seek to control, or even specifically prohibit, this type of short term letting.

Tuesday, 18 October 2016

Lease Break Clauses – What Does Vacant Possession Mean?



How does a tenant satisfy a condition in a break clause that requires the giving of “vacant possession”?

This is a question that continues to occupy the courts and to confound unwary tenants.

Although the term “vacant possession” has been in use for many years, its precise meaning is open to interpretation.

Two recent cases show how important it is for tenants to take a very cautious approach to satisfying this condition, and how difficult it can be to advise a tenant on what to do.

In Riverside Park Ltd v NHS Property Services Ltd [2016] EWHC 1313 (Ch) the High Court ruled that a tenant’s failure to remove demountable partitions, that the court determined were chattels and not fixtures, defeated the tenant’s exercise of a break right conditional on giving up vacant possession.

The partitions were held to be chattels that substantially interfered with the landlord’s possession. Expert evidence stated the partitions (with one exception) were easily removable, being fixed to the raised floor and suspended ceiling.

The court also looked at the object and purpose of the partitions and concluded that, in view of its unique configuration, they were “to benefit the tenant rather than affording a lasting improvement to the Premises”, and hence were a chattel.

Therefore, vacant possession had not been given and the break notice was ineffective.

The facts in the other case, Secretary of State for Communities and Local Government v South Essex College of Further and Higher Education [2016], were very similar. Following service of a break notice, the tenant quit the premises leaving behind internal non-structural partitions and other chattels, including a photocopier, computer screens and a reception desk. It also failed to hand back key fobs.

The tenant argued that the chattels were readily movable and did not prejudice the landlord’s ability to take possession, and that the partitions were items to be reinstated as part of a dilapidations claim.

The court ruled that the tenant had not done anything to demonstrate to the outside world that it had vacated the premises; it hadn’t communicated with the landlord; and its actions amounted to abandonment rather than yielding up the premises with vacant possession. It was in effect storing items at the premises and, as such, it was continuing to use them.

These cases once again demonstrate that, if vacant possession is a condition of a break clause, a tenant must carefully consider what must be removed well in advance of the break date.

A tenant’s advisers, both legal and surveying, must look carefully at what the tenant has installed during the term of the lease, and the provisions of any licences for alterations. It is all too easy to regard items such as partitions as fixtures to be left in situ, whereas these cases show that it is safer to remove them entirely, making good any damage caused by their removal.

It is less common nowadays to see vacant possession as condition in new break clauses and, if it appears in a first draft of a lease, it should be strongly resisted.

Instead, a tenant should only agree to a requirement to give up occupation and leave behind no continuing subleases, which is the suggestion advocated by the Commercial Lease Code (which is a voluntary code).

The Code also suggests that disputes about the state of the premises, or what has been left behind or removed, should be settled later (like with normal lease expiry), which would mean as part of a dilapidations claim.