Is letting out a property breaching a user covenant?

As we have reported numerous times in previous newsletters, many private individuals purchase a property with a view to letting it out. It is hoped that the rental income will pay off any mortgage and in the longer term, the rent will act as income for the property owner.

Many properties bought for these purposes have been flats which are let on a long leases, typically 99 or 125 years long. The flat owner will then let out the flat on a short term assured shorthold tenancy. This is known as 'subletting'.

A property owner must be advised as to the terms of the long lease to ensure that they are permitted to sublet. There may be a covenant (i.e. a promise) in the lease only to let it out with the consent of the landlord, for example.

It is important for any long leaseholder to comply with the covenants in their long lease.

Another typical covenant in a long lease is along the following lines:

'4. 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.'

In a recent case, the question arose whether letting out the property for rental on an assured shorthold tenancy was in breach of this covenant as the letting by the long leaseholder would mean that he is not in occupation of the property.  

It was held on appeal that the subletting of the flat to an assured shorthold tenant was a breach of the covenant.

However, the case also involved a narrow point on whether the Unfair Terms in Consumer Contracts Regulations 1999 (UTCCR) applied to the lease. The first Tribunal held that that the covenant was in any event void as being an unfair contractual term within the meaning so the fact that subletting was a breach of the covenant was irrelevant. On this point, the landlord' appeal was allowed.

The moral of the story is that any subletting of a long lease should only be done after careful consideration of the meaning of the covenants contained in the long lease.

If you are buying a long lease as an investment with the sole intention of letting it out, discuss this with your solicitor before you buy it.

To discuss this or any property related matter, contact us.

Case: Roundlistic Ltd v Jones & Anor [2016] UKUT 325 (TCC)