Nemcova v Fairfield (‘the Airbnb ruling’): Stirring up the Hornets’ Nest of Short-Term Lets

In Nemcova v Fairfield Rents Ltd [2016] UKUT 303 (LC), in what has become known as ‘the Airbnb ruling’, the Upper Tribunal gave guidance on the circumstances in which short-term lets might amount to a breach of covenant prohibiting the use of a property for anything other than ‘a private residence’.  In this article, Jamal Demachkie (who acted for the successful landlord at first instance and on appeal) provides his analysis of this important decision.

The Question

“Does a short-term let breach a covenant in a lease which prohibits a tenant from using her property for any purpose other than as a private residence?” Or, as the Upper Tribunal put it in a little more detail:

“[1] A long lease contains a covenant not to use the demised premises or permit them to be used for any illegal or immoral purpose or for any purpose whatsoever other than as a private residence. If the leaseholder advertises on the internet the availability of the premises (a flat) for short term lettings and grants a series of such lettings, do the leaseholder’s actions breach the covenant?”

This was the question facing the Upper Tribunal in the recent case of Nemcova v Fairfield Rents Ltd [2016] UKUT 303 (LC).

The importance of this question is obvious: With tens of thousands of listings on Airbnb in the UK alone (and over 2,000,000 worldwide), property owners are increasingly utilising Airbnb, and other similar sites, to seek to make an otherwise lawful income from their properties. Yet tenants of leases who utilise these sites are at risk of having their leases forfeited if their actions are in breach of covenant. Nemcova v Fairfield represents the first decision of a Superior Court which tackles this question.

The Facts

The tenant, Ms Nemcova, was the leaseholder of a residential flat granted for a term of 99 years. Her lease, a typical residential long-lease, included several standard covenants relating to user, including:

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

(2) Not to do or permit to be done any act or thing in or upon the Demised Premises or any part of the Property which may be or grow to be a damage nuisance or annoyance to the Lessor or the Company or any of the occupiers of other flats in the Property or to the occupiers of any neighbouring or adjoining property.”

Importantly, the flat was part of a larger block of residential properties, several residents of which had taken umbrage at the use of Ms Nemcova’s flat by a series of short-term Airbnb guests. The residents had complained to the landlord, Fairfield Rents Ltd, who in turn issued an application under s.168(4) of the Commonhold and Leasehold Reform Act 2002, for a determination of breach of covenant before the First-tier Tribunal (‘the FtT’). At the date of the hearing, the landlord declined to pursue any determination concerning breach of covenant relating to nuisance or annoyance to the lessor or other residents; the FtT was asked to make a determination solely in relation to the “private residence” covenant.

There was no dispute that the flat had been let out by Ms Nemcova on several short-term lets.  She estimated there had been seven such lettings over the past 12 months. As well as websites like Airbnb and Holidaylettings, she advertised on Trip Advisor and had set up her own website where the flat was advertised; she stated that most of the lettings were to business users and not holiday guests.

Ms Nemcova argued that, as she paid all rates and bills in respect of the flat, it always remained her main residence. She observed that the lease did not prohibit any sub-letting and argued that, as long as the flat retained its characteristics as a private residence, then what was the difference between a short term let and an assured shorthold tenancy.

The FtT Determination

The FtT determined the matter in favour of the landlord (under the case reference LON/00AK/LBC/0027), but gave Ms Nemcova permission to appeal due to the lack of authority on the meaning of the term ‘private residence’, and due also to the increasingly common practice of short term lets through websites such as Airbnb, which it considered merited the attention of the Upper Tribunal.

The Decision on Appeal

The Upper Tribunal (‘the UT’) picked up the baton with gusto and, in a thorough yet succinct judgment, upheld the decision of the FtT.  The UT’s decision merits careful attention as it contains a number of observations of potential application to numerous landlords, tenants and would-be ‘hosts’ of properties.

It should, perhaps, first be noted that the UT (seemingly aware of the potential hornets’ nest it was stirring up) sought to confine its ruling to the facts, noting that the answer to the question at the beginning of this article, was that:

“[55] Each case is fact-specific, depending upon the construction of the particular covenant in its own factual context. It is not possible therefore to give a definitive answer to the question posed at the beginning of this ruling save to say somewhat obliquely that ‘It all depends’.”

Notwithstanding this caveat, given the relatively common wording in the lease, the far-from unusual facts, and (as the FtT put it) the ‘increasingly common practice’ of short-term lets through websites like Airbnb, it seems likely that this case will be relied upon by landlords and residents alike, seeking to curtail the short-term lets of Airbnb hosts.

In reaching its decision in Nemcova v Fairfield, the UT commenced its analysis by rehearsing the oft-cited passage from Lord Neuberger in Arnold v Britton [2015] UKSC 36, at paragraphs 15-17, which summarises the principles of the interpretation of written contracts (including leases).  The UT observed that, although context is important, it is not ‘everything’.  As stated by the UT (at paragraph [42]) “The emphasis is therefore on the meaning of the relevant words used in their particular, fact-specific, context.”

Nevertheless, by considering the ‘fact-specific context’, certain principles emerge from the judgment:

Duration of the Lease

By which one means the lease which is subject to the restriction on use (and not the short-term let).  In Nemcova v Fairfield, the tenant occupied pursuant to a 99 year lease which, as the UT noted, meant that the parties to the lease must have envisaged several different occupiers of the flat over the years.  As the UT observed:

“[42] … It cannot conceivably have been the parties’ intention that the lessee was the only person who was to be permitted to occupy the premises as a private dwelling-house. On the contrary, the nature of the relationship, a relationship that had the potential to endure through a number of successors in title, was such that the express purpose of the grant – use of the premises as a private residence – could be effected by anyone whom the lessee for the time being permitted to live there.”

Indeed, an earlier decision of the Court of Appeal (Tendler v Sproule [1947] 1 All ER 193), relied upon by the landlord, was distinguished on the basis that Tendler concerned a breach of covenant relating to use as a private dwelling-house in relation to a short tenancy, which was subject to the Rent Acts.

In the UT’s eyes, the length of Ms Nemcova’s lease afforded her greater leeway in her use of the flat when considering what the user covenant meant in the fact-specific context of her lease.  Tenants of long leases may find it easier to argue that a short-term let will not breach such a user covenant.

Identity of the Tenant

By which one means the original tenant to the lease (as a lease cannot change its meaning over time dependent upon who is in occupation at any given moment).  It may be that the fact that a lease was granted to a company, as opposed to a natural person, will impact upon the construction of a ‘private residence’ user clause.  The UT distinguished another Court of Appeal decision (Falgor Commercial SA v Alsabahia Inc [1986] 1 EGLR 41) on similar reasoning in the instant case.

In Falgor, the lease was originally granted to a company, seemingly for the purposes of providing occupation to its officers/agents.  Accordingly, the short term licences granted to visitors were deemed to be a breach of covenant on user other than as a private residence by the company.  Irrespective of whether the licensees were using the property as their private residence, the lessee itself was not.

In Nemcova v Fairfield, however, the context was not so restrictive of the original parties’ intentions.  If Ms Nemcova’s lease had originally been granted to a company in circumstances similar to that in Falgor, she may have found herself in breach of the private residence user covenant as soon as she allowed anyone else to use the property.

Presence of Other Covenants Restrictive of Use

In Nemcova v Fairfield (as already noted), the lease contained no substantive restriction on alienation of the whole of the flat.  The UT noted:

“[42] … The lease contains no restriction on alienation of the property as a whole save for the last seven years of the term… There is some control on alienation: there is an absolute covenant prohibiting alienation of part which is a standard term in residential leases of flats. But as long as that covenant is complied with, the lease clearly contemplates the lessee being able to deal with the property with substantial freedom.”

This consideration appears to have largely swayed the UT into finding (see paragraph [46] of the judgment) that the private residence restriction would not be breached provided ‘the occupier’ (whatever the status of that occupier) occupies the property as a private residence; which provided a further reason for distinguishing Falgor.

The corollary of this observation, of course, is that a tenant is more likely to find him or herself in breach of a private residence covenant if the lease also contains other material restrictions on alienation.

‘A’ Private Residence vs ‘The’ Private Residence

In Nemcova v Fairfield, the clause restricted user other than as ‘a’ private residence.  The UT held (at paragraph [48]) that there was a difference between ‘a’ and ‘the’ private residence.  A clause providing for use as ‘the’ private residence was suggestive of the residence being the ‘main’, ‘only’ or ‘principal’ residence of the occupier.  Not in this case, held the UT; the occupier for the time being must be using it as his or her private residence, even if it is not their only residence.

Again, a tenant may find him or herself more easily in breach if the covenant in question refers to user other than as ‘the’ private residence.

Payment of Rent/ Licence fee

In the vast majority of these Airbnb transactions, the guest will pay a fee; it is a commercial transaction at its heart.  The UT confirmed (at paragraph [50] of the judgment) that payment by the occupier to the tenant has no effect on the nature of use.  Whether a private residence covenant has been breached will be determined independently of whether payment is received.

Where this leaves tenants who allow third parties (or even friends) to ‘house sit’ whilst they are on holiday remains to be seen.

Purpose of Short-term Let

In Nemcova v Fairfield, the tenant argued that she did not let out her flat to holidaymakers, but that the majority of her guests were professionals using the flat for business purposes.  The UT (who agreed with the FtT) held that the motive of the guest will not be decisive, and the purpose to which they are putting the premises will not necessarily mean that the tenant is in breach of a private residence covenant.

Duration of Short-term Let

So far so good for Airbnb hosts.  All of the above considerations appear to suggest that Ms Nemcova was not acting in breach of covenant.  However, the above deliberations inexorably led the UT to find that a primary factor (if not the primary factor) in such a scenario will be the duration of the short-term let.

The UT, like the FtT before it, considered a further Court of Appeal case: Caradon District Council v Paton [2000] 3 EGLR 57.  Caradon (a case concerning breach of covenant relating to use “for any purpose other than that of private dwelling-house” where the tenants let out their properties for 1-2 week holiday lets in the summer months) appeared to import the concept of a ‘home’ into the definition of ‘a private dwelling’, observing that:

“Both in the ordinary use of the word and in its context, it seems to me that a person who is in a holiday property for a week or two would not describe that as his or her home. It seems to me that what is required in order to amount to use of a property as a home is a degree of permanence, together with the intention that that should be a home, albeit for a relatively short period, but not for the purposes of a holiday“

(per Latham LJ), and:

“A person renting a holiday house for, say, one or two weeks, is not using it, in any sense, as his home. On the contrary, he leaves his home in order to have his holidays somewhere else… There appears to me to be a significant distinction between, say, an assured tenancy of six months, and a one or two-week holiday let. In the one case, the property is likely to be being used as a home, and in the second case, it is not.”

(per Clarke LJ)

In Nemcova v Fairfield, the UT warned against the danger of importing the word ‘home’ into the covenant, but recognised that the duration of the occupier’s occupation was material.  The UT pithily observed that “it is the use being made for the time being, by the occupier for the time being, that is material”, and concluded (at paragraph [53] of the judgment) that:

“It does seem to me that in order for a property to be used as the occupier’s private residence, there must be a degree of permanence going beyond being there for a weekend or a few nights in the week. In my judgment, I do not consider that where a person occupies for a matter of days and then leaves it can be said that during the period of occupation he or she is using the property as his or her private residence. The problem in such circumstances is that the occupation is transient, so transient that the occupier would not consider the property he or she is staying in as being his or her private residence even for the time being.”

For the Airbnb guests of the flat, it could not be sensibly argued that they occupied the premises as their private residence.  A weekend, or a few nights, is too transient.  Where one draws the line is, of course, a matter to be explored on a case-by-case basis; nevertheless, it is clear that, the shorter the duration of the letting, the more likely it is that the tenant will be in breach of covenant.

Relevance of other Residents

Another important element to consider (though perhaps not as important as duration), is the presence of other residents within the building.  As stated above, the flat was situated within a purpose built block containing a number of other flats (indeed it was the complaints from other residents which appears to have been the catalyst for this application).

The FtT had previously concluded that the covenant in question had important practical advantages for the other residents in the block “who would, we have no doubt, prefer to live with other owner-occupiers or long term tenants as opposed to those using a flat in the Building on a short term let for, perhaps, only a few days” (per FtT decision).

The UT (at paragraph [44]), doubted it was legitimate, when construing a lease, to speculate about the wishes of other lessees of the building, but nevertheless noted that it was important to remember that the user covenant had not only been entered into with the landlord, but also with the lessees for the time-being of the other flats in the block. So said the UT: “It is therefore an entirely proper inference that the current covenant was extracted in part for the protection of those other leaseholders”.

This is an important factor, hidden away towards the end of the UT’s judgment, but which could have an important bearing on future cases.  When considering the meaning of a covenant in a lease, might it be relevant that the covenant was granted for the benefit of other residents?  Will the matter be different in a large block with numerous residents, compared to a converted house with only one other household?  One can readily imagine arguments on both sides of this debate.

The Answer

In this case the answer was: ‘Yes, the tenant’s short-term let was a breach a covenant’.  It seems likely that there are very many other cases out there where the answer will also be ‘yes’.  The impact upon these tenants could be serious; after all, a determination of breach is often the first step to forfeiture of the lease.

Nevertheless, as the UT was at pains to point out, every lease must be considered in context, and subtle differences in the wording of the covenant, or the circumstances in which the lease was granted, may impact upon future decisions. Nemcova v Fairfield leaves a number of other questions unanswered (some of which have been raised in this article), and it is unlikely that the decision will be the last word on this thorny issue.

In the meantime, one thing is clear: tenants who wish to use Airbnb and other such websites to let out their property should carefully read the terms of their lease and ask themselves whether the benefits truly outweigh the risks; they may find that the allure of short-term lets truly has a nasty sting in the tail.