Room with a view - Hostel to fortune?

15 November 2016

The growth of the so-called ‘sharing community’ which has led to the meteoric expansion of businesses such as Airbnb is a divisive subject...

The growth of the so-called ‘sharing community’ which has led to the meteoric expansion of businesses such as Airbnb is a divisive subject. Many extol the virtues of being able to travel the country (and the world) ‘living like locals’ with attentive hosts and attractive properties. Others can tell tales of mis-sold accommodation or neighbours finding their tranquil lives ruined by the inconsiderate renting out of properties by their fellow leaseholders to all and sundry (at least if a recent Channel 4 documentary is to be believed). Whichever side of the debate you may be on, we suspect many property owners (or more specifically leaseholders of residential flats) probably don’t stop to read their leases to find out if they are allowed to rent them out this way. A recent case [1] suggests, however, that doing so would be a wise idea, for both the tenants and building owners.

The facts

In the case, Miss Nemcova was the owner of a first floor flat in a development in Enfield. While she had used the property as her home, for various reasons, the property had increasingly been vacant over the last 12 months. Given the location, she decided to market her property via the Airbnb website as available for short term rentals and had arranged several lettings, typically to business people needing short term accommodation with easy access to London. In her evidence she confirmed that the property had been let out for no more than 90 days in the previous 12-month period. Her landlord, however, had taken exception to this and brought a claim for breach of her lease obligations. Specifically, the provision in the lease which said:

“Not to use the Demised Premises, or permit them to be used for any immoral purpose or for any purpose whatsoever other than as a private residence” (emphasis added).

What is a private residence?

This was the central question that the tribunal had to consider. In their view there were two key elements for that test to be satisfied.

Occupation had to be ‘as a residence’. The leaseholder argued that this simply meant that the property had to be physically used for residential purposes. There was no suggestion that the property has been changed or adapted in some way or that any of the ‘guests’ were running businesses from the flat. However, the tribunal went on to state that there was a second element to the test…

The concept of ‘residence’ meant using the property ‘as a home’. That meant not just cooking and sleeping there, but that there had to be some degree of permanence. If anyone had asked any of the guests whether they considered the property their home for the duration of their stay, they would almost certainly have said ‘no’. And this, said the tribunal, meant that the tenant’s decision to offer the property for rent on a website breached the strict terms of the lease.

So what lessons can be learned?

The tribunal was at pains to point out that this case turned on its interpretation of one clause in a lease, and that it would be dangerous to generalise that the decision reached here would apply to every lease and every situation. Nonetheless the wording of this lease was not far removed from what would be found in many residential flat leases. Renting out the property on a longer term basis (such as on an assured shorthold tenancy) would certainly not have breached the provision about residential use (although it might have required the landlord’s consent). But these arrangements were treated as akin to booking a hotel room or hostel accommodation, very much a transient arrangement.

The lesson for leaseholders is to consider carefully their leases and take suitable advice on what may or may not be acceptable under the terms of their lease. They may also need to take account of restrictions on allowing others to live in their properties and prohibitions contained in their mortgage deed, as well as the possible tax consequences of running a property rental business.

For landlords the decision may provide a useful tool for preventing the potentially undesirable effects of leaseholders renting out their properties to strangers who will have less concern about maintaining the harmony of a block of flats. Because these properties are, by and large, openly advertised on the internet, identifying flats which are being let out in this way is a relatively simple exercise to carry out. Alternatively, negotiating ‘Airbnb’ clauses into existing lease documents might prove its own lucrative sideline in property management…

[1] Nemcova v Fairfield Rents Ltd [2016] UKUT 303 (LC)

The content of this article is for general information only. For further information regarding private residences, please contact Alice Harris. Law covered as at November 2016.