Buy to let Landlords beware – letting prevented by lease user restriction

The Upper Tribunal has held that a flat owner was prevented from letting out their flat due to the terms of the lease restriction as to the use of the property. The landlord successfully appealed against a decision at first instance that the flat owner was not in breach of covenant.

In the case of Roundlistic Limited v Jones and Seymour [2016] UKUT 325 (LC), a restrictive covenant confirmed the maisonette’s use to occupation by the tenant and their family.

This was held to mean meant that only the flat owner and their family could occupy and so the tenant was prevented from sub-letting, despite the fact under-letting had not been explicitly banned elsewhere in the lease.

Originally, a First-tier Tribunal ruled that the landlord was not entitled to enforce a breach of covenant.

However, the landlord took his case to the Upper Tribunal, which has since ruled in their favour and allowed an appeal.

The Upper Tribunal decision in Roundlistic Limited v Jones and Seymour [2016] UKUT 325 (LC) is a useful warning to buy-to-let investors to carefully review the terms of the flat lease before they purchase a buy to let property as it may be the case that they are unable to let it out.

In this case, the alienation provisions in the lease did not prohibit sub-letting but the user clause of the lease contained a restriction as to use to which the flat could be put. The user clause stated the property could only be used as a ‘single private dwelling house in the occupation of the Lessee and his family’.

The tribunal, in the first instance, found that while there was a breach of the covenant, the freeholder was estopped from relying and that even if that were wrong, the relevant clause constituted an ‘unfair term’ and so was not binding on the flat owners.

The freeholder appealed to the Upper Tribunal. The flat owners did not seek to appeal the adverse element of the tribunal’s decision, but the Upper Tribunal considered it anyway.

Unfortunately for the flat owners, it found in favour of the freeholder. So this type of user restriction does prohibit subletting.

The estoppel argument failed as it was required that the flat owners have proceeded on an assumed state of fact or law that was either shared with the freeholder or acquiesced by them. The contrary was true here on the facts.

Nor could an estoppel be founded. At the time of purchase of the lease, as there was no evidence that the freeholder knew that the flat had previously been occupied by a friend in breach and even if they had known, while that might have been sufficient to waive the right to forfeit the Lease over that breach, it was not sufficient to prevent the freeholder from relying on a breach of the user restriction in the future.

As regards potentially being an unfair contract term, the Upper Tribunal confirmed this can potentially apply as the freeholder was a property company that could properly be described as a ‘seller or supplier’. However for the flat owner, the relevant regulations do not apply to contractual terms which reflect mandatory statutory provision and this lease had been granted pursuant to the statutory right to claim a new lease.

The significant increase in the number of flats acquired as buy-to-let investments may mean that there are number of flats that are subject to this form of restriction and so are being let in breach of the lease.

It is imperative Landlords review sample leases from each of the buildings they hold reversions to see whether such a favourable user clause is present and, if so, whether they are able to take enforcement action in this regard that might produce added value to their reversionary interest by way of flat owners offering to pay a premium to vary the lease to allow sub-letting.

Tenants will also need to carefully consider the lease terms carefully before they acquire a flat as a buy-to-let investment and where necessary ensure that it is amended if that can be achieved.

If you would like any more information in relation to this article then please feel free to contact me via email: gunduz.misiri@bowlinglaw.co.uk or visit my profile.

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