Using a Leasehold Property for Airbnb: A Guide to Risks and Regulations

Platforms like Airbnb offer a tempting option for leaseholders to generate income from their properties. However, navigating the legal landscape surrounding short-term lettings in England and Wales can be tricky. Leaseholders must be aware of a complex web of laws, regulations, and contractual obligations to avoid potential pitfalls. This guide explores the key considerations for leaseholders and landlords contemplating Airbnb rentals.

The UK Government consulted with stakeholders on the impact of short term lettings in the UK, and in February 2023, the Department for Culture, Media & Sport published their analysis of the call for evidence Prepared for the Department for Culture, Media & Sport February 2023

Online rental platforms like Airbnb and Booking.com have dramatically boosted the variety and number of short-term stay options available to travelers. These platforms connect property owners with those seeking temporary accommodations, expanding consumer choice. They've also unlocked new, flexible income streams for owners and provided alternative marketing channels for diverse lodging businesses. However, concerns have arisen regarding adherence to regulations (planning rules, health and safety standards) and the impact on established communities (noise, disruptive behavior, or reduction of long-term rentals). In response, some countries and cities (like Scotland, Northern Ireland, New York City, Barcelona, and Amsterdam) have implemented measures in recent years, including registration and licensing programs.

In Quarter 4 (Oct to Dec) 2023, there were nearly 1.9 million stays in UK short-term lets booked through the three online collaborative economy platforms participating in this report (Airbnb, Booking.com and Expedia Group); this totalled nearly 18.1 million guest nights - ONS Short-term lets through online collaborative economy platforms, UK: Quarter 4 2023

Data from organizations on sharing economy platforms suggests that most listings (between 69% and 76%) are for entire properties. The average booking typically lasts 3-4 days, with properties occupied less than a month annually. Hosts on these platforms generally earn around ￡6,000 per year. It's important to distinguish these figures from professional rentals, often managed by dedicated lodging businesses with distinct business models separate from the sharing economy. Notably, nearly two-thirds of all short-term rentals in England are concentrated in the South West, South East, and London.

Understanding the Risks

Legal Precedent: The 2018 case of Bermondsey Exchange Freeholders Limited v Ninos Koumetto stands as a significant reminder for leaseholders considering short-term lettings like Airbnb. In this case, the freeholder successfully argued that the leaseholder's use of Airbnb breached the lease's subletting and property use clauses. The court's decision highlights the potential clash between Airbnb and leasehold agreements, particularly when leases restrict subletting, specify residential use, or require a permanent occupant. This case emphasises the importance of reviewing lease terms and potentially seeking freeholder consent before engaging in short-term rentals.

Complying with Regulations

• Health and Safety: Leaseholders acting as landlords must comply with health and safety regulations. This includes fire safety measures as mandated by the Regulatory Reform (Fire Safety) Order 2005, and smoke and carbon monoxide alarm installations as per the Smoke and Carbon Monoxide Alarm (England) Regulations 2015. Non-compliance can lead to fines and legal repercussions.
• Fire Safety: Ensure your property meets fire safety standards. This includes having a functioning fire alarm system and clear escape routes.
• Smoke and Carbon Monoxide Alarms: Install smoke alarms on every floor and carbon monoxide alarms in rooms with solid fuel-burning appliances.

Insurance

While freeholders typically insure the building, leaseholders need to ensure their contents insurance covers short-term lettings. Standard policies might not cover damages or liabilities arising from Airbnb rentals. Remember that additional coverage like Airbnb's Host Guarantee and Host Protection Insurance are not substitutes for comprehensive homeowners.

Mortgage

Leaseholders with mortgages must obtain consent from their lender before using Airbnb. Failure to do so can lead to changes in mortgage terms, higher interest rates, or even repossession.

Planning

Local authorities can issue enforcement notices for operating short-term rentals without planning permission, resulting in fines up to ￡20,000. The Deregulation Act 2015 allows short-term lettings for up to 90 days in a calendar year without planning permission, but local exemptions and restrictions might apply.? It's crucial to check with your local council for specific regulations.

Understanding Your Lease

Lease agreements may restrict short-term lettings through clauses regarding:

• Sub-letting: Many residential leases restrict leaseholders from subletting their flats or allowing temporary occupants without a formal lease agreement (assignment) or sublease and some have minimum sublet terms (often 6 months). Landlords may sometimes grant permission for subletting, but this typically requires their consent beforehand. This restriction is known as an "alienation covenant." The Bermondsey Exchange Freeholders v Ninos Koumetto case highlights this point. The court ruled that the leaseholder's use of Airbnb constituted a breach of the alienation covenant because it either involved unauthorised subletting or permitting temporary occupants without a proper lease agreement.
• Change of Use: Leases often specify that properties must be used as private residences. Short-term lettings might violate clauses prohibiting business activities or requiring a degree of permanence in occupancy, as seen in the case of Nemcova v Fairfield Rents Ltd.? Breaching these clauses can lead to complaints and potential legal action.
• Pets and Noise: Allowing pets or causing disturbances can breach lease terms and lead to disputes with other residents or the freeholder.

I turn then to the User covenant (Clause 2.4) which, it will be recalled, provides that the Tenant is:?“Not to use or permit the use of the Demised Premises or any part thereof otherwise than as a residential flat with the occupation of one family only…”?For my part, I am in entire agreement with the Judge. The user covenant is clear. Clause 2.4 is breached when the 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. Just such a breach was found by the Judge in the instant case and I can detect no error in that finding. - HHJ Luba KC?Bermondsey Exchange Freeholders Ltd v Ninos Koumetto?(2018)

Taking the Next Steps

• Review Lease Terms: Carefully examine your lease for any restrictions on subletting or short-term lettings. You might need your landlord's consent for Airbnb arrangements.
• Comply with Mortgage Terms: Ensure your mortgage doesn't prohibit short-term rentals.
• Communicate with Stakeholders: Discuss your plans with your landlord or management company to avoid disputes and ensure compliance.
• Seek Legal Advice: If necessary, consult a lawyer to understand the risks and ensure you comply with all legal obligations.

Landlord Considerations

Landlords should:

• Monitor Lease Compliance: Review leases for subletting restrictions and communicate your policies to tenants.
• Enforce Lease Terms: Monitor short-term rental platforms and address any breaches promptly.
• Draft Future Leases Carefully: Include clear covenants to prevent short-term lettings if they might negatively impact the property or other residents.

Conclusion

While Airbnb offers substantial opportunities, leaseholders must navigate legal, financial, and operational complexities. By thoroughly understanding their lease terms, complying with regulations, securing appropriate insurance, and obtaining necessary consents, leaseholders can minimise risks and ensure their short-term lettings are both profitable and compliant.

About Us:

Donald Millar and I are property lawyers with extensive experience advising clients on buying, selling, developing, leasing, and financing UK residential and commercial property. Whether you're a first-time buyer, a seasoned investor, a funder, or a developer navigating complex projects, We can guide you through the legal process and ensure your interests are protected.

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