What is Peppercorn Rent? Small, Notional Rent to Secure a Contract
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by Robert Jones, Founder of Property Investments UK
With two decades in UK property, Rob has been investing in buy-to-let since 2005, and uses property data to develop tools for property market analysis.
One type of rent that is sometimes found in property is a peppercorn rent. Here is what peppercorn rent is, how much peppercorn rent actually is, and why more people are likely to be paying peppercorn rent in the future.
What Exactly is a Peppercorn Rent?
Like any other rent, peppercorn rent is rent which is payable for the right to use or occupy a property.
However, a peppercorn rent is a tiny rent. It is, as the name suggests, comparable in size to the size of one peppercorn.
The most important thing to know about peppercorn rent is that it is such a small amount that it is impractical to pay or collect.
The purpose of peppercorn rent is that it is a legal concept used in situations where legally rent should be paid but where there is no intention or desire to pay or collect it. It is a notional rent.
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Origins
It is sometimes said that the idea of peppercorn rent dates back to the 16th or 17th century. In those days peppercorns were much more valuable than they are today in real terms, having value as a spice. So it is said that landlords would sometimes ask for their rent to be paid in actual peppercorns. By the 18th century, the meaning of the term peppercorn had changed to become an insignificant amount.
Do You Have to Pay?
In theory yes you do have to pay a peppercorn rent. Anyone to whom a peppercorn rent is owed is entitled to collect it.
In practice however a peppercorn rent does not have to be paid, nor can it be collected, due to its small size. Anyone who technically owes peppercorn rent does not need to pay it. Anyone who is owed peppercorn rent is not expected to collect it.
It is possible for the term peppercorn rent to be used to describe a small rent which is actually payable. This is not the usual, legal definition of peppercorn rent, however.
What is the Purpose of Peppercorn Rent?
Many people ask why, if a peppercorn rent cannot be paid or collected, why it exists at all.
The purpose of a peppercorn rent is that it facilitates the formation of a contract where a sum needs to be paid to make the contract legal – something known as consideration – but where there is no intention for rent to be paid.
A common use of peppercorn rent is with a long-term leasehold property.
With a leasehold property, the leaseholder or tenant has a contract with the freeholder giving them a right to occupy that property for a stated period of time. In order for that contract to be valid there must be provision for a rent payment, normally known as ground rent, to be paid annually.
Where there is no intention to receive or pay rent under a long leasehold contract the rent in such a contract may be set at one peppercorn.
Historically ground rents for leasehold property were relatively small, nominal amounts.
In recent years, however, some new house developers have sold their properties on a leasehold basis with much higher ground rents. They have also included onerous terms, such as ground rents of £200-£400 a year which double periodically. This practice has caused serious problems for some leaseholders who, as well as having to pay an increasingly unaffordable annual ground rent, find that their homes are unsaleable, or saleable only at a large discount on market value.
The Leasehold Reform (Ground Rent) Act 2022
In 2022 a new law was introduced to change this practice. The Leasehold Reform (Ground Rent) Act 2022 came into force in June 2022. The effect of this law is to restrict ground rents on newly created long leases of houses and flats to an annual rent of one peppercorn, ie. a nominal rent of no practical value.
Hence, centuries, after it was first used the concept of peppercorn rent, has gained new significance in the property industry. In future, more leaseholders who have not previously encountered this concept will find themselves liable to pay peppercorn rent.
This article is intended to be a general guide as to how peppercorn rents relate to leasehold property in English law and is not legal advice. It is essential to take expert legal advice where necessary. Property law is different in Scotland.