This is the second of a two-part review of the legal issues with holiday lets. The first was published in the Estate Gazette on 15 March, in which we reviewed the security of tenure applicable to holiday lettings and what to do when a holiday guest outstays their welcome.

Restrictions on owners renting out properties for short-term holiday lets

In this update we review the restrictions on owners renting out properties for short-term lets, focusing on covenants in long leases.

Here is the scenario we will be addressing: – A management company keeps receiving complaints from residents who own luxury flats on long term leases in a block near the seafront on the South Coast of England. One owner has decided to rent out his penthouse online, offering short term lets for tourists and business travellers. The other residents are fed up of guests arriving at all times of the day hauling luggage, loud music played 24/7, partying until 3am and sitting out on the balcony late at night talking loudly. Not a situation that many would welcome living next to.

What advice can we give to the management company? The first step is to review the lease terms to determine whether they are permitted to sublet their property out as a holiday let. The most common clauses are:

User Covenants

• “Not to use or occupy the Flat otherwise than as a single private residential unit.”
  Short term holiday lettings are unlikely to be considered as use of the property as a single private residential unit. It has previously been held that a clause such as this is breached when a flat is not being used as a residential flat but as short-term temporary accommodation for transient visitors paying for such use by way of commercial hire to tourists or business travellers and others through the use of internet-based websites such as Airbnb. (Bermondsey Exchange Freeholders Ltd v Koumetto [2018] 4 WLUK 619).

In the case of Nemcova v Fairfield Rents Ltd [2017] 1 P.&C.R.4 (UT) the Upper Tribunal held that occupation by holiday guests for a few days instead of months did amount to a breach of the user covenant not to use the property otherwise than as a private dwelling. It was concluded that there must be a degree of permanence, beyond being there for a few nights for a property to be classed as a private residence. Note, it was held there was no difference between a “private dwelling” and a “private residence”.
The tenant in our scenario will be in breach of this lease term when renting out his property to visitors staying for a few days or a week or so at a time. To avoid this breach, we would ideally want to see the occupiers staying for around six months, in line with the usual minimum term of an Assured Shorthold Tenancy.

• “Not to Use the Property for the Purposes of a Business”
  Most user clauses are expressed so as to prohibit use of the flat for the purposes of a business. Decisions of the courts to date have tended to favour the landlord when considering whether no business user covenants prevent holiday use. The courts have given a wide meaning to the word “business”, seeing the object as being only to allow premises to be used as a dwelling. Letting out a property to holiday guests is likely to be found a clear breach of this covenant as it is beyond normal domestic and residential activity and is more than ancillary or subordinate to the residential use such as a hobby or occupation of the tenant (Florent v Horez (1984) 48 P.&C.R. 166).

An important distinction was made in the case of Triplerose Ltd v Beattie [2020] UKUT 180 (LC) between using the property as a business resource (renting out for holiday lets) compared to carrying out a business (running the letting business from the property). The tenant in this case was held not to be in breach of a covenant not to carry on a business at the property as this was being done elsewhere.

Applying these points to our scenario, the tenant would be in breach of the covenant wording set out above for using the property for the sole purpose of his lettings business for commercial gain. As he is running the business from elsewhere, the tenant would not be in breach of a covenant that prohibited carrying on a business at the property.
Alienation covenants preventing subletting or assignment of the whole

• “Not to part with or share possession of the whole of the flat or permit any company or person to occupy the flat except by way of an assignment or underlease of the whole”
  This clause was considered in the Bermondsey Exchange case and it was held that renting out holiday homes was a clear breach of any express alienation covenant such as this one. It would be a different outcome if the property was large enough to only rent out part, such as an outhouse, as this would not constitute assigning or underlease of the whole.

“Without prejudice to the absolute prohibitions hereinbefore contained not to assign or underlet the whole of the Demised Premises without the prior written consent of the Landlord.”
Often alienation clauses include provision to obtain written consent from the landlord which the tenant will breach if not obtained before renting out for a holiday let. However, note a licence here, as is typically used for holiday lets, does not require consent.

Nuisance/Annoyance clause

• “not to cause or permit or suffer a nuisance or annoyance to other residents”
  Regular disturbances caused by holiday lets are likely to be a breach of this covenant as it prevents other residents from peacefully enjoying their properties. The term “annoyance” covers more activities than a legal nuisance. Residents can simply be annoyed by the regular footfall of guests entering the building. One holiday let landlord in the case Laxcon Developments Ltd v Rogers (2015) FTT was found to fall foul of this covenant and was held to be just as responsible as if he were hosting the parties himself.

Remedies for breaches of leasehold covenants

Now that we have established the tenant in our scenario is in breach of its lease covenants, we shall review what remedies are available to the management company.

Injunction

Landlords can apply for an injunction prohibiting a tenant from letting its property out for short term lets, as happened in the Bermondsey Exchange case. The trial judge had a discretion to injunct or not but explained, amongst other reasons, that he was granting the injunction to prevent other residents also using the property in such a manner.

Another bold step might be to apply for a share of the profit. Westminster City Council successfully obtained possession and an order for unlawful profits of over £100,000 from a social housing tenant who let his property on Airbnb (Westminister City Council v Harman [2019]).

Forfeiture of the long lease for breach of covenant relating to holiday lets

Terminating a residential lease is not a straightforward process and long leases are no exception. Lease terms must expressly reserve the right to forfeit for breach of covenants. Unless the tenant has expressly admitted the breach or arbitration proceedings have determined a breach has occurred, a claim will need to be submitted to the Residential Property Division of the First-Tier Property Chamber pursuant to s.168 Commonhold and Leasehold Reform Act 2002. Only then, following the Tribunal determining that there has been a breach, can a s.146 notice be served upon the tenant, seeking to forfeit the lease for the breach and giving the tenant a reasonable time to remedy the breach.

Some care has to be taken by the landlord to ensure that they do not waive the right to forfeit whilst carrying out this process and before they even have the right to forfeit. Once the time has lapsed on the s.146 notice, as there is likely to be someone residing in the property, the landlord will need to seek a court order to forfeit the lease and recover possession.

That concludes our two-part series on our review of regulations around holiday lets. For more information/advice on the subjects covered contact the writers David Eminton (Partner) and Nicola Davies (Partner) at Paris Smith LLP’s Property Litigation team.

This article was first published in the Estate Gazette Magazine on the 22 March 2021 – Happy holidays? What to do when owners breach lease terms