- To Airbnb or not to Airbnb… that is the question
To Airbnb or not to Airbnb… that is the question
To Airbnb or not to Airbnb… that is the question29 Nov 2019
Since Airbnb was founded in 2008, the demand for private holiday rentals has grown significantly and there has been a subsequent rise in the number of homeowners using short-term rentals as an opportunity to generate additional income from their spare room or house. Here, the Kuits real estate finance team outline a few of the considerations lenders need to be aware of.
The property being let may be subject to restrictions set out in contractual agreements. For example, it is common to see a residential long lease restricting sub-letting the whole or any part of the property for less than six months’ at a time. The Beetham Tower in Manchester is an example of where serviced accommodation is strictly prohibited and, in accordance with the Management Regulations, entry to short-term rental guests is prohibited. It is important for lenders to be aware of any restrictions when making their decision on whether to lend, as this may have an impact on their borrower’s ability to service the loan.
Lenders have different rules on whether short-term renting is acceptable or not. It is likely that a residential mortgage will include a condition that the property cannot be let without first obtaining the lender’s written consent. Many homeowners will not think to check with their lender before letting their property on a short-term (or long-term) basis. Before consenting to such a request, lenders should consider the full impact of short-term holiday lets and the potential impact on value this may have.
There are no hard-and-fast rules around planning for short term rentals. In the 2012 Court of Appeal judgement in Moore v SSCLG  EWCA Civ 1202, the court found that each case depends on its own facts and it is a “matter of fact and degree”. In the Moore case, the Court found that there had been a material change of use and the property no longer fell within Use Class C3 (dwellinghouse) under the Town and Country Planning (Use Classes) Order 1987.
The commentary following this judgement suggests that it is reasonably safe to assume that a short-term rental comprising accommodation that sleeps up to 6-8 people, occupied by family groups who constitute a ‘single household’, will likely fall within Use Class C3. However, if the property is larger and sleeps more than eight people, where guests are part of different groups, arriving at different times (like in the 2012 Moore case), this may well constitute a material change of use to a Sui Generis use (a use of its own kind).
If it is found that such a change of use has occurred, enforcement action can be taken up to 10 years following commencement of such use (not four years as applies for residential properties). It will be important for lenders to take legal advice to ensure that the particular circumstances are considered from a planning perspective.
Provided a property has adequate planning permission for use as a dwellinghouse under Use Class C3, a homeowner and/or lender may take the view that should such use be deemed to be a material change of use, then the property can always revert back to its authorised use as a private dwellinghouse and occupied by the owner, or, let on a long-term basis (i.e. an AST of six months or more).
In addition to ensuring that the property has the correct planning permission for its use, lenders will need to ensure that there are no additional restrictions set by the property’s local authority.
In Greater London, The Greater London Council (General Powers) Act 1973 implemented a London-specific rule which restricted short-term renting of less than 90 days for a single stay. Pursuant to the Deregulation Act 2015, homeowners can now rent out their properties on a short-term basis for up to 90 nights a year without requiring planning consent from the local authority.
Whilst the original restrictions were limited to the Greater London area, other local authorities are starting to consider whether to follow Greater London in its efforts to restrict the number of nights properties can be let on a short-term basis in any given year. Liverpool City Council, for example, was due to discuss this motion on 18 November 2019.
Lenders should consider whether their borrower’s loan is being serviced by the short-term renting income and, if so, whether a 90-day restriction may have an impact on this serviceability.
Before letting the property, it is imperative for lenders to ensure that the property is adequately insured for the proposed use. Standard residential home insurance is unlikely to be sufficient in the event of a claim being made as a result of damage caused by a short-term stay guest. Whilst Airbnb currently provides a Host Guarantee of up to USD$1,000,000 (roughly £780,000) for property damage and Host Protection Insurance of up to USD$1,000,000 in the event of third party bodily injury or property claims, there are a number of conditions, limitations and exclusions to each policy, and hosts are advised by Airbnb that these policies should not be a replacement to their usual home insurance.
Ensuring that a property being let complies with health and safety regulations and has up-to-date gas and electricity safety inspections is also likely to be a condition of the insurance policy.
Lenders should be aware that homeowners will need to ensure that they declare any earnings from the short-term rental property to HMRC. They may be eligible for ‘Rent a Room’ tax relief, however, they will need to check this with the tax authorities and/or their tax advisor. Whilst it may be tempting for homeowners to try and conceal their rental’s income from HMRC or their lenders, the tax authorities have recently invested in a powerful Connect computer that creates a full profile of taxpayers through external sources, including Airbnb. Not only is declaring this income a legal requirement, complying with all legal and tax liabilities will also be a condition of any loan.
If you’re a lender and would like advice on anything mentioned above, then please contact us.