Peppercorn Leases
A peppercorn lease is a legally binding lease where the rent is nominal—typically £1 per year—rather than market rate. The FRS 102 treatment depends on whether you are a commercial entity or a Public Benefit Entity (PBE).
What is a Peppercorn Lease?
Peppercorn leases are common in related party arrangements (parent company leasing to subsidiary), charity and community arrangements, and government/public sector leases. The nominal rent creates unique accounting considerations under FRS 102.
Commercial Entities
For private companies and PLCs, FRS 102 requires using the actual peppercorn rent in all calculations:
FRS 102 Reference: FRS 102.20.50, Section 33
Related Party Disclosure
| Component | Formula | Result |
|---|---|---|
| Lease Liability | PV(£1/year × term) | ≈ £0 |
| ROU Asset | Liability + Direct Costs | ≈ £0 + costs |
| Interest Expense | Opening Liability × Rate | ≈ £0 |
| Depreciation | ROU Asset ÷ Term | ≈ £0 |
Public Benefit Entities (Charities)
For PBEs (charities, housing associations), FRS 102.34.94-97 requires recognising the 'donated element' of concessionary leases:
FRS 102 Reference: FRS 102.34.94-97
PBE Treatment
| Component | Formula | Result |
|---|---|---|
| Lease Liability | PV(£1/year × term) | ≈ £0 |
| ROU Asset | PV(Market Rent × term) | Significant |
| Donation Income | ROU Asset - Liability | Significant |
| Depreciation | ROU Asset ÷ Term | Significant |
Why the Different Treatment?
The reasoning reflects the economic substance of the transaction:
Commercial Entities
If rent is £1, that represents an arm's length transaction value. No gift or donation element exists—the parties have agreed on the terms commercially.
Public Benefit Entities
PBEs receiving below-market rent are effectively receiving a gift of the difference. This gift should be recognised as income, and the asset recorded at its true value.
Summary
Quick reference for peppercorn lease treatment by entity type:
| Entity Type | On Balance Sheet | In Notes |
|---|---|---|
| Commercial entity | No market value | Yes (if related party) |
| Public Benefit Entity | Yes (ROU Asset at market value) | Yes |
Need help with peppercorn leases?
Lease102 handles both commercial and PBE accounting for concessionary leases automatically.