Peppercorn Ground Rent – What is it?

Peppercorn ground rent is defined by the Cambridge Dictionary as a very small amount of money that you pay as rent. But what does it mean in the context of the UK property market?

22nd July, 2022

Peppercorn ground rent is defined by the Cambridge Dictionary as a very small amount of money that you pay as rent. But what does it mean in the context of the UK property market? Peppercorn rents have been around for hundreds of years, but the introduction of the 2022 Leasehold Reform Act has ignited interest in the topic. 

In this article, we’re going to cover everything that you need to know about peppercorn ground rent. Why is it called peppercorn rent? How much is peppercorn ground rent? How does the leasehold reform act affect ground rent? We’ll answer all of these questions and more. 

If you’re here to get more information on a specific question, such as can you change ground rent to peppercorn? Use the menu below to skip through the article to your point of interest. Otherwise, read on for everything you need to know about peppercorn rent!

What is Ground Rent? 

The existence of ground rent depends on whether or not the property is leasehold or freehold. The difference here is key. A freeholder who owns the freehold title to the property owns the land that the property is built on, as well as the property itself, in perpetuity. A leaseholder tends to just own the property and not the land, and only for a set period (the lease length). A leaseholder essentially rents the land from the freeholder. 

Ground rent is a fee charged to the leaseholder by the freeholder of the land. The origin of ground rent dates back as far as William the Conqueror who granted large swathes of the country to Lords. They were then able to charge their subjects a lease. The structure of leases has changed over the centuries, but the principle remains the same. 

So what does ground rent do? In short, it allows the leaseholder to occupy the land that a leasehold property is built upon. It is only payable if it’s detailed in the lease, and just like other forms of rent, it’s due in regular payments. Failure to pay gives the freeholder the right to pursue legal action. If ground rent is unpaid for a long period and has not been requested by the freeholder, the freeholder may request unpaid rent as far back as six years. This can be either in one lump sum or in several smaller instalments. 

Ground rent can be fixed or escalating. Over the past 10 to 20 years higher ground rents have been introduced, sometimes with escalating clauses, which can cause ground rents to reach unsustainable levels. This has serious implications for the leaseholder. If the ground rent exceeds £250, or £1,000 in London, the lease can be classed as an Assured Shorthold Tenancy (AST) under the 1988 Housing Act. This has two negative implications for leaseholders. First, the property is not likely to be classed as mortgageable by the majority of lenders. Second, the freeholder can file for Ground 8 possession if the rent falls into arrears for three months. 

In response to these punitive ground rents, the government introduced reform in February 2022 with the Leasehold Reform Act. But more on that later. Let’s have a look at peppercorn ground rent. 

 

What is Peppercorn Ground Rent? 

Peppercorn ground rent is ground rent that is extremely low. Usually between £1 and £10 per annum. The term peppercorn has interesting origins. In years gone by it actually meant that the rent would be set at a single peppercorn! Other leases have contained even more interesting means of payment, such as a bouquet of poses or a single red rose. 

Why does it make sense to have such a token amount as ground rent? In reality, freeholders rarely collect peppercorn ground rent. It’s so low that there’s very little value in demanding it. So why not just have zero ground rent? Well, for a contract to be legally binding each side must offer the other “consideration”. This means that each party must provide some form of value to the other. The existence of a peppercorn also prevents the leaseholder from laying claim to the land and puts in place a formal relationship between the two parties. 
 

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How much is Peppercorn Ground Rent?

Nowadays it’s unlikely that you’ll get a lease that demands payment of a peppercorn! Peppercorn ground rent now just means ground rent that is very close to zero. Typically, peppercorn ground rent is between £1 and £10 per year. 

How much is peppercorn ground rent

 

Peppercorn Ground Rent and the Leasehold Reform Act 

High and escalating ground rents have become an increasingly important issue over the past couple of decades. Especially where the conditions are met to class long leases as ASTs under the 1988 Housing act. In response to this issue the government has introduced the Leasehold Reform Act to prevent doubling or escalating ground rents and protect Leaseholders from exploitation. 

The act contains provisions which effectively abolish ground rents by making them peppercorn. Landlords will not be able to charge a “prohibited rent”, defined as a sum in excess of £1. If they do, they will have to refund the amount within 28 days. The legislation won’t be retrospective however, so existing leases won’t be affected. 

Overall the new legislation has been welcomed as a step in the right direction towards leaseholder reform. However, there are concerns about the impact on existing leasehold properties. Without reforms to enfranchisement, it’s possible that a two-tier leasehold system could be created whereby newer peppercorn lease properties are preferred to those formed under previous legislation. 

 

Can you change Ground Rent to Peppercorn? 

Yes you can. There are two ways you can change ground rent to a peppercorn ground rent. If the leaseholder wants to extend their lease then under the Leasehold Reform, Housing and Urban Development Act 1993 they are entitled to extend it by 90 years. This extension can be peppercorn ground rent if they’ve lived in the property for over two years. It’s important to bear in mind that a lease extension can be extremely expensive, ranging into the tens of thousands. So it’s not always a viable option for leaseholders looking to reduce their ground rent payments. 

The second way to change ground rent to peppercorn is through collective enfranchisement. If all leaseholders within a property band together to purchase the freeholders they are able to extend the lease to 999 years and simultaneously implement a peppercorn ground rent. This means that the property will become a share of freehold and is outlined in the Commonhold and Leasehold Reform Act 2002

 

Conclusion

In this article we’ve covered some of the most common questions about peppercorn ground rent. Including what is is, how much it costs, what the Leasehold Reform Act means, and whether or not you can change ground rent to peppercorn. 

If you’re selling your property with peppercorn ground rent, or selling another property to buy one, consider selling to a cash house buyer such as SmoothSale. We can buy any house in any condition, or we can help you to sell your house fast. Get in touch today on 0800 368 8952 to find out how we can help. 

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