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What is a Peppercorn Lease?

           

July 29, 2021 / Kerrie Sheaves

Kerrie Sheaves
Foundational NFP Consulting
1300 SML BIZ

Peppercorn Leases

What is a Peppercorn Lease?

Peppercorn leases are rental agreements where the lease payments do not reflect the fair market value of the property that is being leased. In other words, the amount paid by the lessee is significantly less than the fair market value.

These agreements usually occur in the Not For Profit sector, where land or property owners may grant a charitable organisation the right to use a premises/venue at ‘peppercorn’ (nominal) rent.

What types of entities could have peppercorn lease arrangements?

The following types of Not For Profits may have peppercorn lease arrangements:

    • Schools leasing Crown land
    • Schools leasing land owed by a religious order
    • Sporting clubs from local councils
    • Boat and yachting clubs from local councils
    • Men’s Sheds leasing land from sporting clubs, councils or churches
    • Surf Lifesavers clubs, etc.

Accounting for Peppercorn Leases

Peppercorn Leases often result in the financial statements not reflecting the true value of economic resources available to the Not For Profit entity.

Accounting standards updated in 2017, require NFP organisations to reflect Peppercorn Leases in specific ways. Therefore, it’s important that your bookkeeper and accountants are up to date on these rules. If you have or are entering into a peppercorn lease you need to make them aware of this.

Not all below market value leases are peppercorn leases.

Other leases, where the lessor provides tenancy arrangements to an NFP for a heavy discount – not a peppercorn arrangement, but for a lease amount significantly less than what would be offered in a commercial arrangement, can also occur. These also need to be treated carefully by your accounting.

The issue is the identification of such leases. Peppercorn leases would be relatively easy to identify.  Other leases with significantly below-market terms and conditions may not be. AASB 1058 does not define “significantly”. Therefore it would be up to each entity to determine what this means in their particular circumstances and it would be wise to consult widely on this.

Grants and Peppercorn Leases

When multiple entities such as a group of sporting clubs work together to build or renovate a shared clubhouse, it’s important that when applying for grants there is clarity about:

    • who owns the asset (venue or land).
    • who the lessee is (which maybe provided via a peppercorn lease arrangement) and
    • who will be the project owner, which could be a different entity from the owner and lessee.

 

There needs to be a clear understanding between the parties about:

    • who is the applicant for the grant (and therefore will receive the money), and
    • who will be responsible for the delivery of the grant project outcomes,
    • and owner of the assets related to that project on completion.

 

To avoid confusion and arguments later, contracts and memorandums of understanding might be needed. These should show permission to change/improve the asset (ie building on it), and define who owns that assets and new fixtures etc when the work is done.

We recommend consulting with a lawyer who understands the NFP sector before applying for Grants which will be used improve or build on assets not owned by your own organisation.

 

Photo by Scott Webb on Unsplash

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