Peppercorn Rent and Peppercorn Leases (FRS 102)
A peppercorn lease is one at nominal consideration: the traditional £1 a year, or something close to it. It is a common arrangement for charity premises, community assets and property granted by a public body. The one thing to be clear about is that FRS 102 has no peppercorn exemption.
There is no third exemption
FRS 102 has exactly two recognition exemptions, both elected under paragraph 20.5: short-term leases and leases of low-value assets. Nominal consideration is not one of them. Where the consideration is a peppercorn, paragraph 20.35 applies instead, and it asks a different question.
FRS 102 Reference: FRS 102.20.35
A common misreading
The first question: is it even a lease?
Where the contractual payments are so low that they are not substantive, the arrangement may not meet the definition of a lease at all. That is the first thing to establish, because if it is not a lease, Section 20 does not apply to it and you are looking at a different part of the standard entirely.
If it is a lease at well below market rent
Where the arrangement IS a lease but at payments significantly below market rent, you assess whether you have received incoming resources: a government grant under Section 24, or, for a public benefit entity, a non-exchange transaction. Those resources are recognised as part of the cost of the right-of-use asset.
FRS 102 Reference: FRS 102.20.35, 20.47(e)
| Situation | Where the benefit comes from | Treatment |
|---|---|---|
| Property granted by a public body at nominal rent | Government grant (Section 24) | Recognised as part of the cost of the right-of-use asset |
| Charity premises at token consideration | Non-exchange transaction, for a public benefit entity | Recognised as part of the cost of the right-of-use asset |
| Payments so low as to be non-substantive | Not applicable | May not meet the definition of a lease at all |
Where this comes up
Almost always in the not-for-profit and public sectors, and in groups. Typical cases are property granted at nil or nominal rent by a local authority, charity premises held at a token rent from a connected party, and community assets held on very long leases at a peppercorn.
Why the £1 is the wrong number to capitalise
If you simply discount the peppercorn payments you get a liability of almost nothing and a right-of-use asset to match, which tells a reader nothing about a right of use that may be worth a great deal. The point of paragraph 20.35 is that the value has come from somewhere: either the arrangement is not a lease, or you have received resources that belong in the cost of the asset.
Public benefit entities
Public benefit entities have their own paragraphs on non-exchange transactions, and a peppercorn property arrangement is a classic case. If you are a charity or another PBE, work through those rather than treating the arrangement as an ordinary commercial lease at a very low rent.
In Lease102
A peppercorn or zero-payment lease can be held on the register with its terms and dates recorded, so the arrangement is visible and documented even where it produces little or no liability. Where you have concluded the arrangement is not a lease, it can be kept as a register-only record: visible alongside your leases, excluded from every calculation, journal and disclosure.