The Oxford dictionary defines peppercorn rent as “a very low or nominal rent”[i]. But just how low is low? And why is it called peppercorn rent anyway? To understand, we first need to know the difference between leasehold and freehold and explore what ground rent is and why it exists.
Homes in England and Wales are sold as either freehold or leasehold. A freehold property gives the buyer complete ownership of their home and the ground on which it stands.
In contrast, when a home is sold as leasehold, the buyer does not own the ground that the property sits upon, and they only have ownership of their home for as long as is stated in their lease.
So, who owns the land and what is a lease?
The land belongs to the freeholder. Anyone can own land on which properties are built, from large investment companies to private individuals. Freeholders grant long leases to properties on their land for a specified number of years, usually 99 or 125 years but in some cases 999 years. The leaseholder will only be entitled to live in the property for the duration of the lease term. Furthermore, the leaseholder will have to seek permission from the freeholder should they want to make any changes to the property.
It is commonplace for flats to be sold as leasehold and houses as freehold. This is because flats share common areas that need to be maintained. So, a freeholder is put in place to take responsibility for the building on behalf of the leaseholders. Freeholders will usually charge leaseholders a regular service fee in order to maintain the building.
A lease is a contract between the freeholder and the leaseholder, which makes each side aware of their rights, responsibilities and obligations regarding the property. In return for occupying the property on their land the freeholder will request a ground rent from the leaseholder, which must be paid throughout the duration of the lease term as specified in the lease.
How much is ground rent and why does it exist?
This varies between property and location but on average, owners of new leasehold homes pay around £300 per annum and sometimes as much as £700 per annum[ii]. Ground rents can be fixed throughout the lease term, but many modern leases contain escalating ground rents. These enable the freeholder to increase the amount of rent payable by a specified amount and in a specific time frame, usually in-line with inflation.
However, there are instances where the leaseholder pays a much lower ground rent. This most commonly occurs in older leases where the terms of the lease have not been updated to reflect inflation. That being said, you can still find new-build leasehold homes with similar lease structures. Sometimes the amount of rent payable in the lease can be so low, for example, £1-£10, that some freeholders don’t even bother to collect it.
This leads us on to peppercorn ground rent. When this is stated in the terms of a lease, it technically means that the leaseholder has to give the freeholder one peppercorn (the type that you would usually grind up in a pepper mill) per annum as their rent. In reality, it means that the leaseholder pays zero ground rent. Clearly, this is quite a strange notion but there’s an interesting reason why peppercorn ground rent came into existence.
Why would a freeholder ask for peppercorns instead of money?
Historically, ground rent was typically very low, so as mentioned above freeholders wouldn’t find much value in collecting it. You might ask yourself, why didn’t they just set the ground rent to zero in the lease? Well, the reason for this is that for a lease contract to be considered legally binding, each side must provide ‘consideration’. This means that both the freeholder and leaseholder must exchange something of value to the other party.
In the past, peppercorns were a valuable commodity like other spices, so it was deemed as absolute consideration to validate the lease contract. However, there are some leases in existence with even more unusual ground rents payable. These include one crab, a single red rose, one apple and a posy of flowers per annum. So, it would seem that freeholders became creative with their leases.
The hypothetical collection of any item, be it a peppercorn, crab, or one-pound coin for an extended period of time, also helps to prevent any claim by the leaseholder for possession of the land. This maintains a formal relationship between the two parties. However, the phrase ‘peppercorn ground rent’ is now used more generally to mean an amount that is small or insignificant.
Is it possible for ground rent to be changed to peppercorn?
The simple answer is yes, but not until the leaseholder wants to extend or vary his lease. Under the Leasehold Reform, Housing and Urban Development Act 1993, a leaseholder can obtain a lease extension of 90 years and be entitled to a peppercorn ground rent if they have lived in the property for two or more years.
However, if the leaseholder extends their lease through negotiation with their landlord, the amount of ground rent they pay will also be up for discussion. This means they will lose their entitlement to a peppercorn ground rent. This isn’t necessarily a negative thing for leaseholders though, as it can be possible to obtain a much more financially beneficial deal.
Depending on the value of a property, its location and the remaining term of the lease, a lease extension can cost tens of thousands of pounds. Furthermore, the cost to extend a lease increases substantially the lower the length of the lease becomes. Worst still for the leaseholder, when the lease expires the freeholder will legally become the owner of the property.
So, it makes sense to extend a lease as early as possible. But if a leaseholder doesn’t have the capital readily available, he may be able to negotiate a lower premium for the lease extension with the freeholder, in return for slightly higher ground rent. This is in effect a way of spreading part of the cost of the premium to extend the lease over the lease term. It’s also an ideal solution for any leaseholder who is selling their property, as they could potentially save thousands that could be put towards their new property.
There is one more way that leaseholders can obtain a peppercorn ground rent. Under the Commonhold and Leasehold Reform Act 2002, leaseholders within a property are entitled to join forces and purchase the freehold from the freeholder. This is called collective enfranchisement and would enable the leaseholders to amend the ground rent payable to a peppercorn. They would also be able to extend the length of their leases to 999 years.
When it comes to lease extensions, it is advisable to seek advice from a legal professional who specialises in property and conveyancing. They can help you to fully understand your rights and obligations so that you can make informed decisions about your property.
One final note on ground rents
Under Section 166 of the Commonhold and Leasehold Reform Act 2002, a leaseholder will not be liable to make any payments for ground rent unless they are served notice in the prescribed format.
Conversely, if the leaseholder fails to make the payment for ground rent once it has been legally demanded, the freeholder can start court proceedings to recover the debt. In extreme cases, the landlord can even commence forfeiture proceedings.
Learn more about the Section 166 Demand Notice
[i] Oxford Dictionaries (2019): https://en.oxforddictionaries.com/definition/peppercorn_rent
[ii] Financial Times (2018): https://www.ft.com/content/27ef07d2-cfb4-11e8-a9f2-7574db66bcd5