James Driscoll considers two recent decisions, each raising the question of whether subletting a flat is a breach of covenant
Key points
- A lease covenant can constitute an “unfair term”, but not if it reflects statutory provisions
- An Airbnb let can amount to a breach of covenant
Long leases of flats usually contain covenants regulating the leaseholder’s use of the premises. Restrictions forbidding business use and to whom (if anyone) the flat may be sublet are two examples.
If the freeholder alleges that a leaseholder has broken a covenant it can seek a determination from the First-tier Tribunal (Property Chamber) (“FTT”) under section 168 of the Commonhold and Leasehold Reform Act 2002 (“section 168”).
In two recent cases the Upper Tribunal (“UT”) has considered restrictions on the use of flats. These are Roundlistic Ltd v Jones and another [2016] UKUT 325 (LC); [2016] PLSCS 210 and Nemcova v Fairfield Rents Ltd [2016] UKUT 303 (LC).
Maisonettes
Roundlistic concerned the lease of one of two maisonettes. The leaseholders purchased the lower maisonette, acquiring a lease which had been extended by the seller (under the Leasehold Reform, Housing and Urban Development Act 1993).
They wished to sublet their maisonette. While there was no covenant expressly regulating this, the lease contained the provision that the lessee was “…not to use the premises hereby demised or permit the same to be used for any purpose whatsoever other than as a single private dwelling house in the occupation of the lessee and his family”. Negotiations over subletting and a variation to their lease foundered. Nevertheless they let their maisonette under an assured shorthold tenancy. In response, the freeholder applied for a determination under section 168.
Although it decided that the subletting was in breach of covenant, the FTT concluded that the freeholder was estopped from alleging breach of covenant (or that the covenant had been waived). It also decided that the covenant was an unfair term (under the Unfair Terms in Consumer Contracts Regulations 1999), since it caused a significant imbalance by imposing more onerous terms on the lessees of the lower maisonette than applied to the lessor in respect of the upper maisonette (for which no long lease had ever been granted).
Allowing the freeholder’s appeal, the UT applied the reasoning in Burchell v Raj Properties Ltd [2013] UKUT 443 (LC); [2013] 3 EGLR 62, where a sublet was found to breach a term in the lease “…to use the flat as a private dwelling for the lessee and his family and for no other purpose”. In other words, it agreed with the FTT that the letting was in breach of the lease. But was the freeholder estopped from complaining of a breach in this case? Here the UT, noting that such an estoppel could not have existed before the leaseholders considered subletting, rejected this argument. Nor was the freeholder in breach of an obligation to grant a long lease of the upper maisonette. There was neither an estoppel nor a waiver of the covenant.
On unfair terms, the UT accepted that the regulations can in principle apply to the terms of a lease (applying R (on the application of Khatun) v Newham London Borough Council and another [2004] EWCA Civ 55; [2004] PLSCS 73). However, the regulations do not apply to terms that reflect statutory provisions, as they did in this case when the previous lessee of the lower maisonette exercised her right to a new lease.
By subletting their maisonette, the leaseholders were in breach of covenant.
Airbnb
What would the position have been if, instead of subletting, they let short-term to tourists and other visitors? This raises the issues (as well as the apparent growing interest, if not to say controversy) caused by owners letting very short term through online homestay network Airbnb. This is what the lessee did in Nemcova, by advertising and allowing her flat to be occupied for very short periods. Under Nemcova’s lease she could sublet the whole of her flat, but did the short or transient nature of her lettings to tourists and others breach her covenant “not to use… or permit them to be used for any illegal or immoral purpose or for any purpose whatsoever other than as a private residence”?
Here the UT cited as the leading authority on the construction of leasehold covenants the decision of the Supreme Court in Arnold v Britton and others [2015] UKSC 36; [2015] EGLR 53. The task – which applies to all contracts – is to focus on the words used in their documentary, factual and commercial context. From this the UT concluded that this covenant was included in part for the protection of other leaseholders who might prefer to live with other owner-occupiers or long-term tenants.
For the covenant to be complied with, the occupier for the time being must be using it as their private residence, though not necessarily their only home. The fact that payment is made for the occupation, or the reason the occupier is there, are not decisive factors.
However, the duration of the lettings that are advertised and granted does affect the issue. For a property to be used by the occupier as their private residence there must be “a degree of permanence going beyond being there for a weekend or a few nights in the week”, where the occupation is so transient that such an occupier would not consider staying there as their private residence even for the time being (see paragraph 52 of the Nemcova decision). By examining the context of the grant of the long lease and the intended relationship between the lessor and the lessee, granting “very short” lettings – of days and weeks, rather than months – necessarily breaches the covenant in question.
James Driscoll is a solicitor and a writer
