What is peppercorn ground rent and how does it work?

Buying a home is a huge milestone, and there’s much to consider beyond finding the perfect property. 

For example, buying either a freehold or a leasehold property will impact whether or not you pay additional charges such as service charges and peppercorn ground rent. 

We’ll reveal what peppercorn ground rent is, how it works, and whether you should change your current ground rent agreement.  

What is ground rent? 

If you buy a leasehold property such as a flat, you’ll own the property but not the land.

So, you’ll have to pay ground rent to the freeholder to own the land your property is on. Ground rent usually covers ownership for a set period of time. 

If ground rent is in the lease, you must pay it. This will be a regular, recurring payment.

This payment does not cover any services the freeholder may also offer, as service charges cover these.  

Alternatively, if you buy a freehold property, you’ll own the property and the land, so you don’t have to pay any ground rent.  

Has ground rent been abolished? 

For many new properties, yes. The Leasehold Reform (Ground Rent) Act 2022 abolished ground rents for most new residential leases in England and Wales created after 30 June 2022.

This means if you purchase a home with a brand new lease, you will not be charged a monetary ground rent.

However, this ban did not apply retrospectively to existing leases.

This left millions of homeowners paying ground rents, with some facing escalating charges that could double over a set number of years, making their properties difficult to sell or remortgage.

To address this, the government introduced further legislation.

The Leasehold and Freehold Reform Act 2024 became law in May 2024, bringing significant changes for existing leaseholders.

While the Act does not remove ground rent from all existing leases overnight, it makes it easier and more affordable to get rid of it by:

• Making it cheaper to extend a lease or buy the freehold.

• Increasing the standard lease extension term to 990 years for both houses and flats.

• Removing the requirement for a leaseholder to have owned their property for two years before they can start the process.

When a leaseholder uses the new process to extend their lease or buy their freehold, the ground rent on their property is reduced to a peppercorn rate.

What is peppercorn ground rent, and how does it work? 

Peppercorn ground rent is an ‘annual rent of one peppercorn’ or ground rent that is very low. 

Following the Leasehold Reform Act of 2022, ground rents on new leases, unless they’re an excepted or non-regulated lease, will be a peppercorn rent.  

Peppercorn ground rent is typically £1 annually. You should always pay it to avoid losing your lease or getting evicted.  

This amount is very small but serves a vital purpose – as a ‘consideration’ so that the contract between a freeholder and the leaseholder is legally binding.  

It also helps avoid the issues caused by escalating ground rents that can make owning a property unaffordable for leaseholders or would struggle to sell it or extend their leasehold.  

Can my freeholder increase my peppercorn ground rent? 

The amount of peppercorn ground rent shouldn’t change and should be a fixed amount, usually £1 a year.  

Can you change ground rent to peppercorn ground rent? 

Yes, you can change your ground rent to peppercorn ground rent. 

A leaseholder can only change their ground rent to peppercorn ground rent if they want to extend their lease by 90 years or change it.

The leaseholder must also have lived in their property for at least two years.  

However, extending your lease can be an expensive option, as lease extensions can cost thousands of pounds.  

Alternatively, collective enfranchisement is an option. 

This is when leaseholders within a property can purchase the freehold and amend the ground rent to a peppercorn ground rent under the Commonhold and Leasehold Reform Act 2002, as well as extend their lease to 999 years.  

You should always seek legal advice from a property specialist before entering or changing a leasehold agreement.  

Get expert mortgage advice 

The law surrounding leaseholds contains significant detail and has been altered by recent reforms.

It is therefore a sensible step to seek professional advice before proceeding. Unbiased can quickly find you a qualified mortgage broker who can find the most competitive deal for you.