Schedule 10 – Right to vary lease to replace rent with peppercorn rent
Paragraph 1 explains the purpose of Schedule 10, which is to confer on a qualifying tenant the right to buy out their ground rent ("the right to a peppercorn rent"). The exercise of the right involves a variation of the tenant’s lease permanently to replace the (relevant part of the) rent with a peppercorn rent.
	Paragraph 2, sub-paragraphs (1) to (4) set out that tenants who qualify for a lease extension under the LRA 1967 or LRHUDA 1993 also have a right to a peppercorn rent.
	However, under sub-paragraph (2), the tenant must have at least 150 years left on their lease to qualify. Additionally, community housing leases and home finance plan leases, which were excepted by the Leasehold Reform (Ground Rent) Act 2022, do not qualify for the right to a peppercorn rent.
	Under sub-paragraphs (3)(b) and (4)(b), tenants who do not have a lease extension right because they have a tenancy of Crown land, or because they do not satisfy the low rent or rateable value tests in the LRA 1967, can still qualify to claim a peppercorn rent.
	Under sub-paragraphs (5) and (6), the right to a peppercorn rent only applies to the part of the rent relating to the property that would be included in a lease extension under the LRA 1967 or LRHUDA 1993. If a qualifying lease also includes additional property, the tenant cannot reduce the rent relating to that additional property to a peppercorn. For example, if a tenant has a long residential lease of a house plus neighbouring farmland, they can reduce the part of their rent that relates to the house to a peppercorn but cannot reduce any part of their rent that relates to the farmland.
	Under sub-paragraphs (7) and (8), if the qualifying lease is a shared ownership lease, the right to a peppercorn rent only applies to the rent payable under the lease in respect of the tenant’s share in the property (so any rent paid by the shared ownership leaseholder in respect of the landlord’s share is not affected by a claim for a peppercorn rent). Sub paragraph (9) outlines key definitions.
	Paragraph 3(1) provides that the right to a peppercorn rent is exercised by serving a "rent variation notice" on the landlord and any other party to the lease (for example, a management company). However, under sub-paragraph (2), a claim for a peppercorn rent cannot be made if the tenant is making or participating in an ongoing lease extension or freehold acquisition claim in relation to the property. Sub-paragraph (3) introduces paragraph 4, which makes provision about the suspension of a rent variation notice.
	If the right to a peppercorn rent only applies to some property let under the tenant’s lease, sub-paragraphs (4) and (5) state that the tenant must identify the relevant property in their rent variation notice. Under sub-paragraph (6), the notice must also state what premium the tenant proposes to pay and what other variations may be needed to the lease as a consequence of the reduction in rent (for example, the removal of a rent review clause).
	Sub-paragraphs (7) to (9) deal with how a claim for a peppercorn rent can be protected so it will continue to be effective if the landlord disposes of their interest in the property, and how a tenant can assign an ongoing claim if they sell their lease.
	Paragraph 4 addresses cases in which a tenant of a flat makes a claim for a peppercorn rent, but other tenants in the building bring (or are already bringing) a collective enfranchisement claim to acquire the block of flats. Paragraph 4 provides for the claim for a peppercorn rent to be suspended until the collective enfranchisement claim is completed.
	Paragraph 5 requires the landlord to reply to the tenant’s notice with a counter-notice before the end of the response period specified in the tenant’s notice. The landlord must be given at least two months to respond. The counter-notice must explain whether or not the landlord admits that the tenant had the right to a peppercorn rent on the relevant date, and whether or not they admit that the right applies to the portion of the rent in respect of which the right is claimed. The landlord must also respond to the proposed premium and any other consequential variations which the tenant wants to make to the lease.
	Paragraph 6 applies where the landlord raises a dispute in their counter-notice or where the landlord fails to give a counter-notice. Sub-paragraphs (1) and (2) allow the landlord or the tenant to apply to the tribunal to resolve the issue if the landlord’s counter-notice disputes whether the tenant has the right to a peppercorn rent, what rent that right applies to, the premium or any consequential amendments of the lease. Sub-paragraph (4) allows the tenant to apply to the tribunal to determine their claim if the landlord fails to give a counter-notice. In either case, the application must be made within six months of the counter-notice or the date on which the counter-notice should have been given.
	Paragraph 7 applies if the landlord admits or the tribunal determines that the tenant has a right to a peppercorn rent and all the terms of the variation of the lease (including the premium) are agreed or determined. (However, where there are several landlords, their individual shares of the premium do not have to have been determined.) The rent variation notice is then "enforceable". Under sub-paragraph (2), on payment of the premium, the landlord and tenant must execute the variation of the tenant’s lease. Under sub-paragraph (4), the variation must put in the place the peppercorn rent agreed with the landlord or, where appliable, determined by the tribunal.
	Sub-paragraphs (5) and (6) specify what premium is payable in exchange for the variation of the lease. The premium is the value of the landlord’s right to receive the rent that is replaced with a peppercorn rent. Subject to the three specified exceptions, the premium is the same as the "term" portion of the premium payable on a lease extension under paragraph 25 of Schedule 4.
	Paragraph 8 enables the reduction of rent under intermediate leases where a tenant is exercising the right to a peppercorn rent. Paragraph 8 matches the equivalent provisions that apply to lease extensions – see paragraphs 8 and 9 of Schedule 8. It allows the landlord or tenant under a relevant intermediate lease to give notice requiring the variation of their lease, and all inferior intermediate leases, to reduce their rent. The reduction in rent will account for the loss in rental income from the qualifying tenant. Under sub-paragraph (8), an intermediate leaseholder’s rental obligation to their landlord cannot be reduced under this paragraph by more than the reduction in the rent they receive from their tenant. Under sub-paragraphs (9) and (10), a landlord under an intermediate lease who suffers loss due to the variation of their lease is entitled to a share of the premium proportional to their loss.
	Paragraph 9 gives the tribunal the power to resolve disputes about the variation of intermediate leases under paragraph 8. It also empowers the tribunal to ensure that rent variation notices can be validly served where a landlord is missing, and, where necessary, to order that variations of intermediate leases can be executed by a person appointed by the tribunal.
	Paragraph 10 explains that, where a qualifying lease is not varied in accordance with paragraph 7, the landlord or tenant can apply to the tribunal. The application must be made within four months. The Tribunal–
can order that the rent variation notice is to cease to have effect; or
can make a suitable order to ensure the variation takes place. The tribunal’s power includes ordering that the variation of the lease should be executed by a person appointed by the tribunal in place of the landlord.
	Paragraph 11 deals with cases in which the landlord under the qualifying lease (or a third party to the lease) is missing. It enables the tribunal to make an order dispensing with any requirement to serve the rent variation notice on the landlord or third party. It also gives the tribunal the power to order that the variation of the qualifying lease should be executed by a person appointed by the tribunal in place of the landlord or third party.
	Paragraph 12(1) sets out the circumstances in which a rent variation notice ceases to have effect – for example where the notice is withdrawn (sub-paragraph (a)), where the tribunal decides the right is not exercisable (sub-paragraph (e)), or where a time limit for applying to the tribunal expires (sub-paragraphs (f) and (g)). If the notice ceases to have effect, then, under sub-paragraph (2), the landlord is under no further obligation to deal with the claim.
	Paragraph 13 contains the general costs rule that applies to claims for a peppercorn rent. The tenant (or a former tenant) is not liable for any costs incurred by another person because of such a claim. Sub-paragraph (3) prevents arrangements to the contrary; however, sub-paragraph (5) ensures a former tenant and their successor in title may agree how to split their costs. The general rule does not apply to litigation costs awarded by the court or tribunal (see sub-paragraph (4)).
	Paragraphs 14 and 15 set out two exceptions to the general costs rule in paragraph 13. These exceptions parallel those which apply to enfranchisement claims under Part 2, Sections 38 and 39.
	Under paragraph 14, a tenant will be liable to pay the landlord a prescribed amount of costs if their claim ceases to have effect under paragraph 12. However, these costs are not payable if the claim ceases to have effect (a) because it succeeds, or (b) due to the application of Section 55 of LHRUDA 1993 where the tenant’s house or flat is subject to compulsory purchase.
	Under paragraph 15, a tenant will be liable to pay the landlord an amount in costs if the premium payable under paragraph 7 for the variation of their lease is less than a prescribed amount. Where the costs incurred by the landlord are reasonable and do not exceed the prescribed amount, the tenant will be liable to pay the difference between the premium payable and the reasonable costs incurred. Where the costs incurred by the landlord are reasonable and do exceed the prescribed amount, the tenant is liable to pay the difference between the premium payable and the prescribed sum.
	Paragraph 16 makes provision for the landlord to serve copies of a rent variation notice on superior landlords, who may be entitled to claim a reduction in their rents under paragraph 8. If the landlord fails to serve copies of the notice on superior landlords (of whom the landlord is aware), the landlord may be liable to the superior landlords for damages for any losses suffered due to the failure to serve.
	Paragraph 17 requires superior landlords to serve copies of the rent variation notice on any other superior landlords of whom they are aware, unless they have been informed that those landlords have already been served. Superior landlords may be liable for damages for any losses caused because of a failure to comply with this obligation.
	Paragraph 18 applies where there are superior landlords who could require reduction of their rents in according with paragraph 8. The qualifying tenant’s immediate landlord (who is served with the rent variation notice under paragraph 3) is given authority to deal with the qualifying tenant’s claim for a peppercorn rent. Any agreement by the immediate landlord or determination of the tribunal is binding on the superior landlords.
	Paragraph 19 applies where a superior landlord has served a notice seeking reduction of the rent under their intermediate lease under paragraph 8. The immediate landlord has authority to deal with the qualifying tenant’s claim for a peppercorn rent on behalf of the relevant superior landlords. The immediate landlord may receive the premium on behalf of themselves and the other landlords and hold it pending determination of their shares under paragraph 8(9) and (10). However, any of the relevant superior landlords may require the qualifying tenant to pay the entirety of the premium into court. The superior landlords must make such contribution as is just to the immediate landlord’s costs of dealing with the claim for a peppercorn rent.
	Paragraph 20 sets out which provisions of the LRHUDA 1993 apply for the purposes of Schedule 10, and how these provisions may have a modified effect in relation to claims under Schedule 10.
	Paragraph 21 contains a power which enables regulations to be made for the purpose of giving effect to the rights of the tenant under Schedule 10. In particular, sub-paragraphs (2) and (3) explain that the regulations may make provision about notices, and sub-paragraph (4) explains that regulations may be used to amend paragraph 20.
	Paragraph 22 sets out the definitions for the purposes of Schedule 10.