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Friday, 3 March 2017

Energy Efficiency Regulations Looming – New Guidance Issued

With just over a year to go until the Energy Efficiency Regulations* take effect, the government has issued guidance to landlords of non-domestic properties in the private rented sector.

Subject to a few exceptions, from 1 April 2018 it will be unlawful to grant a tenancy to new or existing tenants if the property has an EPC rating of band F or G (shown on a valid Energy Performance Certificate for the property).

From 1 April 2023, landlords must not continue letting a non-domestic property which is already let if that property has an EPC rating of band F or G.

Where a landlord wishes to continue letting property which is currently sub-standard, they will first need to ensure that energy efficiency improvements are made which raise the rating to a minimum of E.

There must be a risk, looking to the future, of even being satisfied with a still-low E rating as those buildings are potentially at risk of some future tightening of the regulations, or “regulation-creep”.

In certain, limited, circumstances landlords may be able to claim an exemption from this prohibition, which includes situations where all improvements which can be made have been made, and the property nevertheless remains below an E.

Where a valid exemption applies, landlords must register it on a database called the PRS Exemptions Register.

Full details of the exemptions and the register are given in the guidance.

Failure to comply with the regulations puts the landlord at risk of enforcement action being taken resulting in a financial penalty.

The regulations don’t apply to properties that are not required to have an EPC (for example some, but not all, listed buildings).

Guidance for domestic properties, also subject to the regulations, is expected soon.

*Energy Efficiency (Private Rented Property) (England and Wales) Regulations 2015.

UPDATE 14/3/17 - see this excellent summary from Clifford Chance, who have distilled the guidance into 10 key questions for commercial property owners. It includes suggestions for next steps.

Monday, 6 February 2017

Concealed Identities - Preventing Property Fraud

It’s a fundamental principle of registered conveyancing that registration itself vests the legal estate in the registered proprietor.

But what if that registration is brought about as a result of someone fraudulently disposing of property that does not belong to them?

In Patel v Freddy’s Limited & Others [2017] EWHC 73 (Ch), the High Court has recently ruled against a claim for rectification of the register by a property owner whose property was transferred by a fraudulent transfer.

A fraudster claiming to be AP transferred AP’s house to a buyer (F) who immediately sub-sold the house to a sub-buyer (Freddy’s). The house was registered in the name of Freddy’s.

The facts, which are set out in the judgement, are worth reading.

At common law the transfer from the fraudster to F, and then from F to Freddy’s, would have been of no effect and AP would still own the house.

But, to quote Justice Elizabeth Cooke, the world of registered titles is very different.

Freddy’s is the registered proprietor and owns the property as a result of the “statutory magic” wrought by Section 58 (1) of the Land Registration Act 2002: “If, on the entry of a person in the register as the proprietor of a legal estate, the legal estate would not otherwise be vested in him, it shall be deemed to be vested in him as a result of the registration.”

So if a person is registered as proprietor as a result of a forged transfer, the legal estate nevertheless vests in the transferee by virtue of registration.

Accordingly, Freddy’s was the legal and beneficial owner of the house by virtue of the registration (it had already been established in an earlier case (Swift 1st Ltd v Chief Land Registrar [2015] EWCA Civ 330) that Section 58 does not imply any separation in the legal and beneficial interests).

However, there was a mistake on the register because if the registrar had known the transfer had been executed by a fraudster he wouldn’t have registered it.

Schedule 4 of LRA 2002 provides for the circumstances when the register may be altered to correct a mistake, and again I recommend reading the judgment for a discussion on rectification generally.

In this case, AP argued that Freddy’s had caused or substantially contributed to the mistake by a lack of proper care in the conveyancing process.

So the primary issue before the court was whether or not there could be laid at Freddy’s (and its solicitor’s) door a lack of proper care that substantially contributed to the mistake.

If there was no lack of care, then an order for rectification could not be made.

If there was shown to be a lack of care, then LRA 2002 requires an order for rectification to be made unless there are exceptional circumstances that justify letting the registered title remain where it lies.

On the facts, which are set out at length in the judgment, the Court ruled in favour of Freddy’s and ordered no rectification.

In particular, the court rejected AP’s claim that Freddy’s should have investigated the identity of the seller to F, ruling that:

·       It is not normal professional practice for a buyer’s solicitor to check the seller’s identity. The seller’s solicitor should do that. A buyer’s solicitor is not required to duplicate the checking of the seller’s identity or to check that the seller’s solicitor has done so.

·       There were no special circumstances in this case that required the buyer’s solicitors’ duty to extend beyond normal conveyancing practice.

Neither Freddy’s nor its solicitor had omitted to take steps that would have revealed the fraud.

Accordingly, Freddy’s was entitled to the special protection afforded to the registered proprietor in possession of the property by section 58(1) of the LRA 2002. AP was left with a possible claim for indemnity from the Land Registry.

This decision, as is so often the case, turned on its facts. Nevertheless, it demonstrates the power of registration of title.

Whilst it was recognised that it was not normal conveyancing practice for a buyer’s solicitor to check the identity of the seller, clearly it’s important for professional advisers to remain alert to the possibility of fraud.

But what does that actually mean in practice?

The Law Society Gazette this week comments on what it calls the “widespread confusion” over the scope of a solicitor’s liabilities and what reasonable checks they can make during the buying process – confusion sparked by an action faced by Mishcon de Reya after one of its clients was duped into buying a London property from a tenant posing as the owner.

Mishcon de Reya lost the case* at first instance, but the High Court has since granted leave to appeal and, reports the Gazette, the case is likely to be heard at the end of the year, possibly conjoined with a similar case.

The Law Society is considering whether to intervene in the appeal, and additional guidance may also be issued to practitioners on how to protect themselves from ID fraud.

It’s a growing problem, and a need for greater clarity on what can be done to minimise the risk is pressing, both for property lawyers and their insurers.

*UPDATE 13/2/17: Dreamvar (UK) Limited v Mishcon de Reya - here is a  very good summary and commentary on the case from RPC, with some suggestions of how a buyer's solicitor might try to protect itself in transactions which ring alarm bells that the risk of fraud may be high. Note that in this case registration did not come to the aid of the buyer because the fraud was detected initially by the Land Registry during the registration process and so registration was not completed. The buyer lost out, having paid over the proceeds which were then transmitted to an account in China, and title to the property remained vested in the real owner. Mishcon (who acted for the buyer) were held liable for breach of trust, they were only authorised to release the purchase monies for a genuine completion of a genuine purchase (seemingly because it was felt Mishcon's insurers should shoulder the burden rather than Dreamvar), notwithstanding the fact that if the fault lay anywhere it was with the firm acting for the fraudster, who admitted not carrying out adequate client identity checks. The appeal will be eagerly awaited.

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.


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.


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.