Words by Dustin E. Joyce, Partner Attias & Levy
As we continue to deal with the devastating e!ects of a global pandemic, the arduous balancing act of resuming social and economic ‘normality’ while maintaining pub-lic health remains integral. A useful insight into this context is the recent emphasis on the resumption of the tourism and hospitality sector in particular, which is an industry that Gibraltar heavily relies on economically. Indeed, within the face of encouraging waves of tourism in Gibraltar which has seen accommodation return to full capacity, tourists have resorted to alternative means to accommodate their stays. “is, in turn, has created the foundations for an interesting dilemma to consider – the steady development of short-term lettings and AirBnb’s, the impact this is having on residential estates throughout Gibraltar and whether there is a need for stricter legal regulation in an increasingly novel area which is surrounded by underlying legal ambiguity.
The question arises whether a short-term let would breach a covenant in a lease which prohibits a leaseholder from using their property for any purpose other than as a private residence.
The importance of this questions is obvious. With various listings on Airbnb and other sites, property owners are increasingly using such sites, to seek to make income from their proper-ties. Yet leaseholders who utilise these sites are at a risk of having their leases forfeited if their actions are in breach of covenant.
We look at the pitfalls of ‘hosts’ not doing their homework on leasehold covenants.
From a legal perspective, it is therefore import-ant to consider the legality of these short-term lettings in light of the legal instrument that governs the relationship between landlords, management companies and leaseholders – the Lease. Issues are raised when considering the wording of residential Leases in particular, where covenants often contain ‘user’ covenants that restrict the way in which leaseholders may use the premises. As set out in leading cases on the basic construction of leasehold clauses such as Arnold v Britton [2015], the general principles of contractual interpretation will also apply to leasehold covenants. The effects of this are that courts will likely adopt a strict interpretation of the language of each independent lease when considering whether short-term lettings will be legally permissible. Indeed, on the basis of this framework it is likely that courts will adopt a strict objective basis when interpreting these clauses when applying the applicable test of construing what “a reasonable person having all the background knowledge which would have been available to the parties would have understood them to be using the language in the contract to mean,” as per Chartbrook Ltd v Persimmon Homes Ltd [2009].
Despite the logic with this approach to interpretation, the issue is that there is often ambiguity in the wording of these clauses which may create potential inconsistencies in the application of the law to these existing contracts. Clearly, under this interpretation the legality in which a leaseholder under a residential lease may use his property for short-term lettings will turn towards the actual wording of these clauses, rather than an adherence to what the parties’ themselves had actually originally intended. This becomes particularly problematic when interpreted within a current legal climate, where many leasehold contracts would have been drafted in a distinct legal and commercial con-text.
Recent cases have tended to introduce some clarity in this area. In particular, the case of what has become known at the ‘Airbnb ruling’ court which tackled this question, where guidance was given 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. The covenant to be observed by the tenant in the lease read “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.”
Lawyers for the tenant urged in the appeal that the lease was to be considered as a whole. There were no restrictions on underletting or on granting short term tenancies or licences, no and no requirement for the property to be used as the tenant’s main residence. In dismissing the appeal the court commented that the transient use of the property by the tenant created a set of circumstances where the tenant would not consider the property their private residence and that by granting short term lets of the property for days and weeks at a time this did on the facts of that case breach the covenant under consideration.
In order for a property to be used as the occupier’s private residence, there must be a degree of permanence going beyond stays lasting either a weekend or a few nights in a week. 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 lettings to third parties, the more likely it is that the leaseholder will be in breach of covenant.
The more recent case of Triplerose v Beattie and Anor [2020] held that the duration of a series of short-length lettings was material to determining whether there was a breach of user covenants in a lease. Indeed, what this development in the case law shows is that ultimately whether or not a leaseholder is in breach of its lease will be centred on a review made by the independent judge on a case-by-case basis.
The Courts are therefore applying long established principle to new commercial trends and it is the manner in which they do so that creates uncertainty at present, but which will be clarified as more cases in this area get decided.
Ultimately, it is important to take advise on lease covenants when purchasing property as a buy to let investment or before setting up as a host on a holiday site – failure to observe covenants in a lease could result in the loss of the property. Owners who are borrowers should also consider the terms and conditions of their mortgage before entering into short term lets as they could be in breach of those conditions by sharing occupation even for short periods of time.
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