What is peppercorn rent and how is it connected to leases?

There are two ways in which homes can be sold, either as a freehold or a leasehold. A freehold owner has complete ownership of their home and the land it sits on. When a home is sold as a leasehold, the ownership only expands to the physical building or areas set out in the lease terms and not the ground that the property sits on. 

Most commonly, flats are sold as leasehold, and this is because there are normally communal areas, some that are shared by the other residents, such as; access ways, garden area, car parking, elevators and rooftop garden. The freeholder will remain responsible for maintaining and repairing these areas and can charge a fixed amount for this, known as ground rent. This amount is set out in the lease. 

However, sometimes the amount is so low or such a minimal amount it is known as a peppercorn rent. You may question then, why charge anything at all? The case of Chappell & Co Limited vs Nestle Co Limited ([1960] AC 87) is an early case where the metaphor "peppercorn" was used, which stated that "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". The case shows that in order to have a valid agreement or lease there has to be a consideration, but that the actual amount is not a requisite to it being valid. A peppercorn (a very low or nominal rent) was therefore used to satisfy the requirement for the creation of a legally binding lease contract document. 

Where did the term peppercorn rent come from? 

The term peppercorn is said to have actually come from 16th/17th early century leases where the rent was, in fact, a single peppercorn a year. The peppercorn in those times was valued as a rare spice. It was said that sometimes an employee was rewarded for their hard work by being given a piece of the property to use for their service, but this was just a reward, and they would be charged the peppercorn to be reminded that they did not own the land but could use if for a period of time. However, it is said by the late 18th century the term peppercorn had come to mean anything of insignificant value. There are other terms that have also been used, such as "rose rent", which was the giving of a single rose. 

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How is peppercorn rent relevant now in 2022?

The term peppercorn rent has returned once again to the spotlight through the Leasehold Reform (Ground Rent) Act 2022 (the "Act")  which received Royal Assent on the 8 February 2022 and its provisions will be in force from 30 June 2022 (save in respect of retirement homes which will not be brought within the Act's scope until 1 April 2023 at the earliest). 

The Act restricts ground rents in certain future residential leases to a 'peppercorn' per year. Landlords will also be prohibited from charging an administration charge in respect of the peppercorn ground rent (to deter them from attempting to gain lost income from ground rent by virtue of another charge). The reason behind this is to prevent the rising costs that leaseholders have to pay on ground rent, some doubling over short periods of time. 

The Act will apply to new residential long leases (more than 21 years) that are entered into when the law comes into force and onwards. Leases entered into before the Act comes into force can still demand the ground rent uncapped; however, a landlord demanding ground rent under a lease pre-dating the Act should be cautious to not inadvertently vary a lease to the extent it amounts to a surrender and re-grant. A re-grant after the Act comes into force means its provisions would apply and ground rent would be capped at a peppercorn rent. There are some leases that are excluded from the Act which include business leases, statutory lease extensions, community housing leases and home finance leases. 

Where a Landlord has recovered the ground rent in contravention of this Act and has not paid it back within 28 days, the Landlord may be liable to pay a fine between £500.00 and £30,000.

If you are developing properties you intend to sell as individual leaseholds, you need to ensure they are compliant with the Act and you must ensure that the ground rent is not for more than one peppercorn per year and that no admin fees are charged for collecting the peppercorn rent. 

Prettys' knowledgeable commercial and residential team would be happy to provide further guidance and support on this subject, so please feel free to contact the team. 

 

Expert
Rebecca Cleal
Senior Associate
Radhika Patel
Associate