Quick Questions: The Meaning of a Peppercorn Ground Rent
In The Oxford English Dictionary, the rather unique term, “peppercorn rent” is defined as “a low or minimal rent”. However, what is considered low or minimal can vary greatly. And where does the idea of a ‘peppercorn’ even come from anyway?
To make sense of it, we need to revisit the difference between leasehold and freehold ownership, and define what ground rent is and why that exists!
In England and Wales, properties are bought either as freehold or leasehold. The buyer of a freehold property has complete control over the home and the ground it is built on, whilst a leaseholder leases part of the property (usually an apartment or flat) from the freeholder.
And it is that right to land ownership that makes all the difference.
Land ownership and ground rent
In a freehold property, the ownership of the land belongs to the freeholder. Freeholders offer long leases to properties on their land for a specific period of years, which usually ranges from 99 to 125 years in some circumstances, but occasionally 999 years.
Flats are usually sold as leasehold and houses as freehold. Because flats share common spaces that must be maintained, they are frequently sold as leasehold properties so that a freeholder can take care of the building on behalf of the leaseholders. Freeholders will generally charge leaseholders a service charge to cover the building’s maintenance.
Within that agreement, the lease is the contract between the freeholder and the leaseholder that makes both parties aware of their rights, responsibilities, and obligations – one of which is ground rent. In return for occupying the property on its land, the freeholder will demand a ground rent from the leaseholder, which must be paid throughout the duration of the lease term as set forth in the lease.
And that leads us on to peppercorn rents.
What is peppercorn ground rent?
If a lease specifies peppercorn ground rent, it usually means that the leaseholder must provide the freeholder with one peppercorn (yes, the edible kind) each year as their rent. In reality, that means the leaseholder pays zero ground rent. Though it may seem an odd concept, there is a logical explanation behind its archaic origin.
How does peppercorn rent work?
Ground rent varies depending on the type of property and its location, but on average, owners of leasehold properties pay anywhere between £300 and £700 ground rent per annum (though there are situations where Ground Rent can exceed £1m!).
Ground rents can be set for the entire term of a lease, but some modern leases include escalating ground rentals. These enable the freeholder to raise the rent paid by a certain amount and at a specific time frame, usually in line with inflation.
However, there are times when the leaseholder pays a significantly lower ground rent. This is most often seen in older leases that have not been updated to reflect inflation, and in those leases it’s often possible that the amount of rent owed is a very small cash payment – for example £1 to £10 – so freeholders won’t bother to collect it.
Because the aforementioned minimal ground rents are so low that freeholders won’t find much value in collecting it, it might make more sense to set the ground rent to zero in the lease.
However, that isn’t a legally binding contract. For a lease to be seen as a legal contract, each side (the landlord and tenant) has to provide “consideration”, which means the freeholder and leaseholder must exchange something of value to the other party.
In the past, peppercorns were considered as the least valuable item that still had some monetary value – and so the term stuck. One peppercorn would be deemed as valuable enough to validate the lease contract, and so serves as a token or nominal rent.
Is peppercorn rent the same as ground rent?
Yes, peppercorn rents are the same as ground rents. If the amount is minimal they are considered to be token or nominal rents, which is where the term “peppercorn rent” comes into play.
Likewise, if a leaseholder extends their lease to a long lease under the 1993 Housing and Urban Development Act, they are only required to pay a ‘peppercorn rent’ – effectively a ground rent of nothing. If a lease is renegotiated, the leaseholder can only obtain a 90-year extension and be entitled to peppercorn ground rent if they have resided in the property for two or more years, otherwise they don’t qualify for a lease extension.
Lease or Freeholder?
If you own the freehold of your building, you can reduce your ground rent to a peppercorn if you so wish. It’s just one of the advantages of taking control of your building. Contact us for a quick no-obligation chat to start your journey to freehold ownership.