If you’re purchasing or selling a leasehold you may have come across the term peppercorn ground rent at some point, probably during discussions of a lease extension. But what does peppercorn ground rent actually mean?
A peppercorn ground rent is often found when a premium has been paid for a lease extension. This reduces the ground rent to £0, or a nominal fee such as £1.
It’s a bit like when a shop sells something for a penny just to get rid of it, they can’t give it away, but they must charge a nominal amount to acknowledge the legal contract.
What Is Ground Rent & Why Do I Have To Pay It?
Let’s take it back to the start to look at what ground rent means on a leasehold property, and why you legally have to pay it.
Ground rent is made payable to the freeholder of the property, this is usually made payable annually. It is a contractual rent payment for the occupation of the space your flat or house resides in the land. It is unconnected to service charges, and ground rent doesn’t go towards anything of your benefit. It literally is rent to allow you to keep residing in your property.
If your ground rent isn’t paid on time and you go into arrears you could risk the repossession of your property.
How Much Is The Ground Rent Average Cost In The UK?
The industry average used to be £50, but with doubling ground rent clauses on leases, many exceed this, with some already in excess of £250. However, in some locations such as London, ground rent could be as close to £1,000 per annum.
Ground rent over £250 (outside of London) is classed as an AST, this means that if the leaseholder was to fall into ground rent arrears, then the freeholder could more easily take possession of the property. This has become a huge part of the leasehold scandal, causing saleability issues and a cost in the region on thousands of pounds to resolve this issue with a deed of variation, or lease extension.
However, there are occasions where the ground rent could be as low as £1, where a peppercorn ground rent has been achieved as a direct result of a lease extension.
So, a £1 ground rent per annum seems incredibly attractive as a buyer and seller, but how can you get out of your existing ground rent conditions, as per your lease?
How To Implement Peppercorn Ground Rent
The only way to implement peppercorn ground rent on your leasehold property is to start the process of arranging a formal lease extension. Under the Leasehold Reform, Housing and Urban Development Act 1993, a leaseholder can obtain a lease extension of 90 years and be entitled to a peppercorn ground rent (ground rent zero or a nominal fee such as £1). This can only be carried out if you have been an owner of the property for at least 2 years.
Of course, in doing so this comes at a premium. A lease extension cost can vary depending on a number of factors including; how many years left you have on the lease, the solicitors you choose, and who the freeholder is.
The freeholder is the one that has to grant the lease extension and they can charge whatever they like as they are unregulated. In some cases, it can cost tens of thousands of pounds for a lease extension as a premium is calculated on how much ground rent would be missed out on during the remainder of the lease.
If you are approaching the 80 year mark left on the lease this is when you should act to carry out a lease extension as marriage value starts to set in at this point. If the lease was to run out and not be extended in this time, the freeholder would legally become the owner of the property.
You can find out the likely cost it would be by using this lease extension calculator. This works on generating an estimation of the premium, but this does not take into account who the freeholder is.
Deed of Variation
The cost of a lease extension is eye watering and not something that everyone has the funds to do. You may have plenty of time left on the lease, but onerous ground rent levels may be causing a saleability issue. Another way to resolve this issue with prospective buyers and mortgage lenders is to do a deed of variation.
This is still an expensive route, but can be a lot cheaper. This is again dependent on who the freeholder of the property is. A deed of variation makes an amendment to the lease to stop the ground rent rising for the remainder of the lease. So, if the ground rent is currently £150 and it has a 10 year doubling clause, a deed of variation would remove the doubling clause and ground rent would remain at £150 for the remainder of the lease.
This route is seemingly the most requested by solicitors currently who are coming up against the £250 ground rent issue, but is it the best route? It can be cheaper and will satisfy lenders, but as I experienced, it was something that was still going to cost me £14k+! In this case, a lease of extension would have been a better approach because it would have reduced ground rent to a peppercorn, and added an additional 90 years to the lease. This would have made my property highly saleable!
Final Note On Peppercorn Ground Rent
The leasehold reform which comes into play on June 30 2022 frees future homebuyers from paying ground rent as Landlords will be banned from charging ground rent to future leaseholders in England and Wales. However, this only applies to new residential leases to create a fairer housing system, alleviating homebuyers from exponential and unfair increases to ground rent.
Peppercorn ground rent is the enviable thing that every leaseholder wants, but it’s not cheap to achieve. Whilst the second stage of the leasehold reform has currently been shelved for now, there is hope that in the near future all leases will be reduced to a peppercorn ground rent, but that is all but a dream currently for thousands of leaseholders with existing leases across the UK who are struggling to sell due to onerous ground rent levels.
If you are looking to do a lease extension, thus reducing your ground rent to a peppercorn, always seek advice from a qualified solicitor, and engage with your freeholder to enquire and start the process for a formal lease extension.