Teal blue graphic

AirBnB: Room for a mortgagee?

The community lettings marketplace, AirBnB, recently found itself at the centre of litigation in which a host was found to be in breach of her lease.

The AirBnB website allows users to list a property for people to rent on a short term basis. Since its launch it has become a vast global business with over 2 million listings worldwide, including over 40,000 in London. 

Unfortunately the apparent simplicity of AirBnB is far from being without its risks. For example, most residential mortgages prohibit commercial use and/or sub-letting without the lender's consent. Renting out might also be in breach of the lease (where there is one), potentially threatening a mortgagee's security and the leaseholder's home. Such risks were recently highlighted in the case of Nemcova -v- Fairfield Rents Ltd, heard in the Upper Tribunal (Lands Chamber).

Background

Ms Iveta Nemcova owned the lease of a one-bedroom flat in Enfield, Middlesex. Under the lease, she had agreed not to use the flat, or permit it to be used, for any purpose other than as a 'private residence'.

On discovering that Ms Nemcova was letting out the flat on AirBnB, the freeholder and landlord Fairfield Rents Ltd brought an action against her, alleging breach of the terms of her lease and seeking forfeiture of it. This was despite the fact that the property remained Ms Nemcova's main residence and she paid all utility and council tax bills for it.

Whilst the lease contained clauses requiring Ms Nemcova not to assign or underlet any part of the property without the landlord's prior consent, there were no other specific restrictions on the use of the property, such as prohibiting its use for holiday lets.

The key issue was therefore whether, on the 90 days or so a year when Ms Nemcova's flat was let out (mostly to holiday makers and business travellers), it was being used as a ‘private residence’.  The First Tier Tribunal held that it was not.

Outcome

On appeal, the First Tier Tribunal's decision was upheld, with the judge concluding that for a property to be occupied as a private residence there needed to be an element of permanence (ie more than just at weekends and/or several nights during the week, as in this instance). Where a property was being occupied in a transient manner, such as by AirBnB customers staying for just a matter of days, there was insufficient permanence for the Tribunal to regard the property as being a private residence.

It was not relevant that the occupier might have another more permanent residence, as there was no specific requirement in the lease that the occupier must use the property as their only, main or principal residence. It was simply a matter of whether the occupation was for such a short duration that the occupier would regard it as being equivalent to a hotel room.

Somewhat unhelpfully to those seeking the clearest guidance, the Tribunal noted that its decision in this case was sensitive to the particular facts. Nevertheless, it does provide clarification of the meaning and concept of a private residence where that is relevant to the determination of whether the terms in a lease had been breached.

Commercial risks

So what are the wider implications? In terms of the practical effect of the decision, impairment of mortgage security (where the property is leasehold) is now a significant risk.

Assuming that a mortgagor owns the leasehold title to a property and that the terms of the lease require its use as a private residence, this case may assist the landlord and/or freeholder in arguing that the terms of the lease have been breached if it is let out on a short-term basis, such as through AirBnB, and as a consequence apply to forfeit the lease, putting both the security of the leasehold title itself and the lessee's occupation of the property in jeopardy.

Of course, whilst a mortgagee can apply for relief from forfeiture to preserve its security over a leasehold title, this is potentially a significant drain on resources, with no guarantee as to outcome.

It is worth noting that the Nemcova decision is not the only worry that lenders should have in this area, as legal challenges to the legality of AirBnB lettings in the U.S. (for example in New York City and New Orleans, where the courts have declared such property use unlawful) threaten to make their way across the Atlantic. Such developments could prove problematic were a lease prohibits use for illegal purposes (as it did in Ms Nemcova's lease).

The challenges faced by lenders seeking to protect their security from forfeiture are not getting any easier, particularly where the lease contains no requirement that formal permission be obtained to sub-let, such as with local authority properties in London, where the need for permission for sub-lets for fewer than 90 consecutive nights per year fell away in 2015, so long as the provider of the accommodation remained liable for the council tax.

Mortgage lenders would be wise to make specific enquiries of the mortgagor's intended use of the property when requests are made to convert to a buy-to-let product or otherwise sub-let the security property, to ensure that no covenant issues arise. Similarly, lenders may look to bolster their requirements of conveyancers under the CML Handbook, leading to more detailed enquiries and warranties.

There are perhaps opportunities for innovative IT solutions to identify leasehold titles advertised on websites such as AirBnB too. The information could be fed back to lenders for appropriate checks to be carried out and any necessary action taken.

Freeholders may also fall foul of such risks, as most mortgage terms and conditions contain similar requirements to use the security property in a particular manner (such as a private residence). Additionally, most home insurance policies would not cover use of the property under a short-term sub-let such as AirBnB, further risking terms of a mortgage being breached (through the owner's failure to maintain adequate insurance)

Whilst AirBnB and similar websites have clearly caught the imagination of homeowners and travellers alike, legal issues now surfacing raise interesting challenges about competing interests. How lenders reconcile their customers' enterprise with the need to protect their security is no doubt one of them.

Our team of experts are specialists in advising on a safe navigation through risks such as those highlighted here. We would be happy to discuss the impact of these recent developments in further detail.

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at December 2016. Specific advice should be sought for specific cases. For more information see our terms & conditions.




Insights & events View all