What Is Peppercorn Rent?

Peppercorn rent sounds like something from Dickensian times, and it very much is a historic legal term, but it is still relevant today. This unusual legal term is used in the Leasehold Reform (Ground Rent) Act 2022 which affects leaseholders, landlords, managing agents, property developers and investors. In this blog, I will talk about what peppercorn rent means, the Ground Rent Act, and the meaning of peppercorn ground rent.

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What Does Peppercorn Rent Mean?

Peppercorn rent refers to a small token amount charged for the rental of a property. It is meant to meet the requirements of a legally binding contract. The phrase was used in this context in the case of Chappell & Co Ltd v Nestle & Co Ltd. The judge ruled that something asked for ‘in consideration’ (or payment) for the fulfilment of a contract does not need to have economic value.

“A contracting party can stipulate for what consideration he chooses. A peppercorn does not cease to be good consideration if it is established that the promisee does not like pepper and will throw away the corn” – Lord Somerville, Chappell & Co Ltd v Nestle & Co Ltd [1960(AC 97)].

Where Does The Term ‘Peppercorn Rent’ Come From?

In the 16th and 17th centuries, spices like pepper were a lot more valuable than they are today and it was common for them to be used as currency. Also during this time, employees were offered a property or part of a property as part of their payment for work. They did not own it but were considered a tenant for the time they were employed. They would pay a nominal amount in the form of one peppercorn per year as a symbolic rent payment.

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What Does A Peppercorn Have To Do With Ground Rent?

The phrase ‘peppercorn ground rent’ is often used when describing the ground rent paid on leasehold properties. A leasehold property is one where the homeowner owns the house but not the ground it is built on. Individual apartments within blocks of flats are also sold as leasehold properties. Residents often pay ground rent to the freeholder, aka the party who owns the building. This goes towards the maintenance of the whole building as well as communal areas.

Freeholders who do not perform maintenance on the building or communal areas, such as in the case of a leasehold house, often charge peppercorn ground rent. As mentioned before, this is a nominal amount needed to fulfil the leasehold contract. Some property developers and freeholders offer a peppercorn ground rent, especially on properties with long leases of up to 999 years. This offers more affordability and stability to potential buyers of a leasehold property.

What Is The Ground Rent Act?

The Leasehold Reform (Ground Rent) Act 2022 restricts the amount of ground rent that can be charged on certain residential properties to one peppercorn per year (yes, really). This effectively bans ground rent for leaseholds sold after 30th June 2022. The Act also forbids the freeholder to collect admin fees on the collection of the peppercorn rent. Any landlord or freeholder who claims ground rent not permitted by The Act is subject to a fine of between £500 and £30,000.

This Act came about in response to the ground rent crisis of the 2010s. Some housing developers were charging upwards of £1000 per year in ground rent and included escalation clauses in contracts to increase the ground rent over time. This made it difficult for buyers to obtain a mortgage, and for owners of leasehold properties to sell their houses at market value.

FAQ: What properties does the Ground Rent Act apply to?

The Ground Rent Act applies to any residential properties with a long lease (more than 21 years) sold after 30th June 2022, or 1st April 2023 for retirement homes. Business properties are exempt from the Act, as are certain kinds of community housing. The Act also does not apply to existing leases, unless a statutory lease extension has been granted, in which case they will already revert to a peppercorn ground rent.

How Does The Ground Rent Act Affect Property Investors?

If you are selling a leasehold property, you must make sure it is compliant with the Ground Rent Act. The Act currently does not apply to existing leaseholds, but some freeholders are changing their existing agreements to remove ground rent charges just in case the law changes. It is perhaps important to note, that landlords are under no obligation to collect the actual peppercorn, and I can’t imagine it being worth anyone’s while to bother with it!

The Act is largely a good thing for property investors, as you will get more value for money when both buying and selling residential properties. It makes leasehold new builds a more tempting investment prospect, as they will not be subject to ground rent. However, older leasehold properties may become somewhat of a burden to property investors. If you do not own the freehold rights to a property and the ground rent is due to someone else, it could make it difficult to sell. If you have owned the property for 2 years or more, you could look into getting a lease extension, where the ground rent will drop to the peppercorn amount once the extension commences. I recommend you consult with a solicitor or other expert in the matter before making any decisions involving leasehold properties purchased before the Act came into law, i.e. 30th June 2022.

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