What is Peppercorn Rent?
(Last Updated: 26/09/2023)
26/07/2023
754
6 min read
Key Takeaways
- Peppercorn rent is a nominal fee, which is just enough to establish an ongoing legal contract
- It literally is one peppercorn per year!
- Under leasehold reform most new leases must have their ground rent set at peppercorn rent
Peppercorn rent, an ancient practice in property leasing, has gained renewed importance in the context of recent leasehold reforms. With growing concerns over leasehold practices and the rights of leaseholders, this unique lease arrangement has re-emerged as a means of safeguarding tenant rights and promoting fair treatment within the real estate market.
Ground rent is a property industry term given to a rent that is usually paid annually by owners of leasehold properties. The cost of ground rent and the levels and rate at which it increases depends on the terms of your lease.
Previously, many leaseholders were stuck with unfairly high ground rent which could even double in cost at regular intervals.
How does a peppercorn rent work?
Peppercorn rent is a nominal (symbolic) amount of rent that is paid to the freeholder as consideration for the lease. The leaseholder doesn't have to pay any money to the freeholder, however in order for the lease to be legally binding the lease needs to include some form of consideration between the leaseholder to the freeholder for the occupation of the freehold that their leasehold sits on.New leases must have peppercorn rent. Under the Leasehold Reform (Ground Rent) Act 2022, leases extended informally must have peppercorn ground rent for the duration of the extension, once the pre-existing lease has expired. There are some exceptions to this, which can be explained by your lease extension solicitor. When following the formal route, the ground rent falls to peppercorn from the completion of the lease extension, so affects the remainder of the pre-existing lease as well as the new extension.
Some leases, whereby the lease has been extended or you own a share of freehold with a 999 year lease, can have Peppercorn ground rent (the latter by consent of the share of freeholders).
Generally Ground Rent over £250 is considered to be too high. You may be able to persuade your freeholder to reduce this to peppercorn with a Deed of Variation.
What is the origin of Peppercorn Rent?
During the Middle Ages, powerful landowners and even the Crown granted land or property for charitable purposes or public use. To maintain legal ownership and prevent adverse possession claims, landlords accepted nominal rent payments, often in the form of a single peppercorn. This practice established a legally binding lease agreement while ensuring the property remained in the landlord's control.In the 16th Century a peppercorn was highly valued, so it could be used as consideration (payment) in a transaction. The fact it wasn't of gold or silver value didn't make a peppercorn worthless, but it did mean there was a value, even if it was just a nominal one. Rather than focusing on the monetary value, peppercorn rent emphasizes the preservation of legal tenure, ensuring that the tenant acknowledges the landlord's ownership of the property.
The Leasehold Reform, Housing and Urban Development Act 1993 specifies for formal lease extension, "a new lease of the flat at a peppercorn rent for a term expiring 90 years after the term date of the existing lease".
Read more - Lease Extension Process.
Why do new leases have peppercorn rent?
The term adopted in the Leasehold Reform (Ground Rent) Act defines a peppercorn rent for the first time, which is ‘an annual rent of one peppercorn’. The Act restricts ground rents on new leases (unless an excepted or non-regulated lease) to a peppercorn rent, effectively restricting these ground rents to zero financial value. There is no obligation on a landlord to levy a peppercorn rent.Do leaseholders have to pay a Peppercorn ground rent?
A freeholder is not obliged to collect a peppercorn rent from you - the leaseholder, although they could ask for it if they wanted to. If the freeholder did, then the leaseholder would have to give a physical peppercorn - not money.What transactions use the term Peppercorn?
It is often used when:- Extending your lease using the formal lease extension process. You can agree to use it within an informal lease extension, however this isn't always agreed.
- Share of freehold lease extension. The share of freeholders who are also the leaseholders don't want to pay themselves (and other shareholders) ground rent, so they often surrender their lease and register a new one with 999 years and a peppercorn ground rent. Some share of freeholders may have included normal ground rent so check
Leaseholders extending to the new 999 year lease term will need to be wary of freeholders negotiating for higher ground rent in exchange for the longer lease term. As the 999 year term is currently only possible under the informal lease extension process, the ground rent on the extension will be set at the discretion of the freeholder.
Frequently Asked Questions
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Written by:
Andrew Boast
Andrew started his career in 2000 working within conveyancing solicitor firms and grew hands-on knowledge of a wide variety of conveyancing challenges and solutions. After helping in excess of 50,000 clients in his career, he uses all this experience within his article writing for SAM, mainstream media and his self published book How to Buy a House Without Killing Anyone.
Reviewed by:
Caragh Bailey
Caragh is an excellent writer and copy editor of books, news articles and editorials. She has written extensively for SAM for a variety of conveyancing, survey, property law and mortgage-related articles.
