Peppercorn (legal)
Encyclopedia
A peppercorn in legal parlance is a metaphor for a very small payment, a nominal consideration, used to satisfy the requirements for the creation of a legal contract
. "A peppercorn does not cease to be good consideration if it is established that the promisee does not like pepper and will throw away the corn." Somervell LJ in Chappell v Nestlé [1960] AC 67. As an example of literal usage, a peppercorn has been used for almost 200 years as consideration for leasing a building in Bermuda.
, and other countries with similar common law
systems, a legal contract requires that both sides provide consideration
. In other words, if an agreement does not specify that each party will give something of value to the other party, then it is not considered a binding contract, and cannot be enforced in court. This requirement does not exist in contracts with civil law
systems.
However, courts will not generally inquire into the adequacy or relative value of the consideration provided by each party. So, if a contract calls for one party to give up something of great value, while the other party gives up something of much lesser value, then it will generally still be considered a valid contract, even though the exchange of value greatly favors one side. Courts, however, will reject "consideration" that was not truly bargained for. For example in the American
case Fischer v. Union Trust Co., the Michigan
court held that one dollar paid in exchange for the sale of real property did not constitute valuable consideration since the transaction was not bargained for. The dollar is considered nominal consideration, not because the dollar was too small an amount, but because it did not induce the seller to part with the property. Such promises that are motivated by love and affection are insufficient to constitute consideration.
So, in order for an essentially one-sided contract to still be valid and binding, the contract will generally be written so that one side gives up something of value, while the other side gives a token sum such as one pound, one dollar, or—literally—one peppercorn.
Peppercorn payments are sometimes used when a struggling company is sold. A failing company's net worth
may actually be negative, since its liabilities may exceed its assets. So if some other party agrees to take over the company and assume its liabilities as well as its assets, the seller may actually agree to make a large payment to the buyer. But the buyer must still make some payment for the company—even if that payment is only one dollar or one pound—in order to establish that both sides have given consideration.
A peppercorn is also used in more balanced contracts, where one side wishes to conceal the nature of their payment. For example, since real estate contracts are generally matters of public record, the purchaser of a house may not wish to list the exact amount of the payment on the contract. But there must be some specific payment listed in the contract, or the contract will be considered void for lack of consideration. So the contract may be written to reflect that the house is being sold in return for "ten dollars and other good and valuable consideration". The ten dollars is the "peppercorn" that provides concrete consideration and ensures that the contract is valid, while the actual amount paid for the house is hidden and referred to only as the "good and valuable consideration".
Another common example of a peppercorn payment being used in legal contracts is the English practice of peppercorn rent, which refers to a nominal rental sum for property, land or buildings. Where a rental contract is put in place and the owner of the property wishes it to be rent-free it is normal to charge, say, one pound sterling as a peppercorn rent. Again, this is because, if the owner wants to lease the property, they must charge some rent so that consideration exists for both parties.
Furthermore, a peppercorn rent is often used as a form of nominal ground rent
where a (potentially substantial) premium has also been paid on commencement of a long lease of, say, 99 or 125 years (a "virtual freehold"). The notional collection of the annual peppercorn rent helps to maintain a formal landlord and tenant relationship between the two parties, precluding the risk of a claim for adverse possession
from the tenant arising, were no consideration to be paid for an extended period.
of St. George's
#200, in Bermuda
, rents the Old State House
as their lodge for the annual sum of a single peppercorn, presented to the island's governor
on a velvet cushion atop a silver platter, in an annual ceremony performed since 1816 on or about April 23.
The Sevenoaks Vine Cricket Club in Sevenoaks
, England
, rent the Vine Cricket Ground
from Sevenoaks Town Council at a yearly rent of 2 peppercorns which covers the ground and pavilion. The council in return, if requested, gives a new cricket ball to Baron Sackville
every year.
Contract
A contract is an agreement entered into by two parties or more with the intention of creating a legal obligation, which may have elements in writing. Contracts can be made orally. The remedy for breach of contract can be "damages" or compensation of money. In equity, the remedy can be specific...
. "A peppercorn does not cease to be good consideration if it is established that the promisee does not like pepper and will throw away the corn." Somervell LJ in Chappell v Nestlé [1960] AC 67. As an example of literal usage, a peppercorn has been used for almost 200 years as consideration for leasing a building in Bermuda.
Overview
In English lawEnglish law
English law is the legal system of England and Wales, and is the basis of common law legal systems used in most Commonwealth countries and the United States except Louisiana...
, and other countries with similar common law
Common law
Common law is law developed by judges through decisions of courts and similar tribunals rather than through legislative statutes or executive branch action...
systems, a legal contract requires that both sides provide consideration
Consideration
Consideration is the central concept in the common law of contracts and is required, in most cases, for a contract to be enforceable. Consideration is the price one pays for another's promise. It can take a number of forms: money, property, a promise, the doing of an act, or even refraining from...
. In other words, if an agreement does not specify that each party will give something of value to the other party, then it is not considered a binding contract, and cannot be enforced in court. This requirement does not exist in contracts with civil law
Civil law (legal system)
Civil law is a legal system inspired by Roman law and whose primary feature is that laws are codified into collections, as compared to common law systems that gives great precedential weight to common law on the principle that it is unfair to treat similar facts differently on different...
systems.
However, courts will not generally inquire into the adequacy or relative value of the consideration provided by each party. So, if a contract calls for one party to give up something of great value, while the other party gives up something of much lesser value, then it will generally still be considered a valid contract, even though the exchange of value greatly favors one side. Courts, however, will reject "consideration" that was not truly bargained for. For example in the American
United States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...
case Fischer v. Union Trust Co., the Michigan
Michigan
Michigan is a U.S. state located in the Great Lakes Region of the United States of America. The name Michigan is the French form of the Ojibwa word mishigamaa, meaning "large water" or "large lake"....
court held that one dollar paid in exchange for the sale of real property did not constitute valuable consideration since the transaction was not bargained for. The dollar is considered nominal consideration, not because the dollar was too small an amount, but because it did not induce the seller to part with the property. Such promises that are motivated by love and affection are insufficient to constitute consideration.
So, in order for an essentially one-sided contract to still be valid and binding, the contract will generally be written so that one side gives up something of value, while the other side gives a token sum such as one pound, one dollar, or—literally—one peppercorn.
Peppercorn payments are sometimes used when a struggling company is sold. A failing company's net worth
Net worth
In business, net worth is the total assets minus total outside liabilities of an individual or a company. For a company, this is called shareholders' preference and may be referred to as book value. Net worth is stated as at a particular year in time...
may actually be negative, since its liabilities may exceed its assets. So if some other party agrees to take over the company and assume its liabilities as well as its assets, the seller may actually agree to make a large payment to the buyer. But the buyer must still make some payment for the company—even if that payment is only one dollar or one pound—in order to establish that both sides have given consideration.
A peppercorn is also used in more balanced contracts, where one side wishes to conceal the nature of their payment. For example, since real estate contracts are generally matters of public record, the purchaser of a house may not wish to list the exact amount of the payment on the contract. But there must be some specific payment listed in the contract, or the contract will be considered void for lack of consideration. So the contract may be written to reflect that the house is being sold in return for "ten dollars and other good and valuable consideration". The ten dollars is the "peppercorn" that provides concrete consideration and ensures that the contract is valid, while the actual amount paid for the house is hidden and referred to only as the "good and valuable consideration".
Another common example of a peppercorn payment being used in legal contracts is the English practice of peppercorn rent, which refers to a nominal rental sum for property, land or buildings. Where a rental contract is put in place and the owner of the property wishes it to be rent-free it is normal to charge, say, one pound sterling as a peppercorn rent. Again, this is because, if the owner wants to lease the property, they must charge some rent so that consideration exists for both parties.
Furthermore, a peppercorn rent is often used as a form of nominal ground rent
Ground rent
Ground rent, sometimes known as a rentcharge, is a regular payment required under a lease from the owner of leasehold property, payable to the freeholder. A ground rent is created when a freehold piece of land or a building is sold on a long lease...
where a (potentially substantial) premium has also been paid on commencement of a long lease of, say, 99 or 125 years (a "virtual freehold"). The notional collection of the annual peppercorn rent helps to maintain a formal landlord and tenant relationship between the two parties, precluding the risk of a claim for adverse possession
Adverse possession
Adverse possession is a process by which premises can change ownership. It is a common law concept concerning the title to real property . By adverse possession, title to another's real property can be acquired without compensation, by holding the property in a manner that conflicts with the true...
from the tenant arising, were no consideration to be paid for an extended period.
Literal use of a peppercorn
The Masonic LodgeFreemasonry
Freemasonry is a fraternal organisation that arose from obscure origins in the late 16th to early 17th century. Freemasonry now exists in various forms all over the world, with a membership estimated at around six million, including approximately 150,000 under the jurisdictions of the Grand Lodge...
of St. George's
St. George's, Bermuda
St. George's , located on the island and within the parish of the same names, was the first permanent settlement on the islands of Bermuda, and is often described as the third successful English settlement in the Americas, after St. John's, Newfoundland, and Jamestown, Virginia. However, St...
#200, in Bermuda
Bermuda
Bermuda is a British overseas territory in the North Atlantic Ocean. Located off the east coast of the United States, its nearest landmass is Cape Hatteras, North Carolina, about to the west-northwest. It is about south of Halifax, Nova Scotia, Canada, and northeast of Miami, Florida...
, rents the Old State House
State House, Bermuda
The State House in St. George's was the first purpose-built home of the House of Assembly, which then constituted the only chamber of the Parliament of Bermuda. Other than fortifications, it was Bermuda's first stone building...
as their lodge for the annual sum of a single peppercorn, presented to the island's governor
Governor of Bermuda
The Governor of Bermuda is the representative of the British monarch in the British overseas territory of Bermuda. The Governor is appointed by the monarch on the advice of the British government...
on a velvet cushion atop a silver platter, in an annual ceremony performed since 1816 on or about April 23.
The Sevenoaks Vine Cricket Club in Sevenoaks
Sevenoaks
Sevenoaks is a commuter town situated on the London fringe of west Kent, England, some 20 miles south-east of Charing Cross, on one of the principal commuter rail lines from the capital...
, England
England
England is a country that is part of the United Kingdom. It shares land borders with Scotland to the north and Wales to the west; the Irish Sea is to the north west, the Celtic Sea to the south west, with the North Sea to the east and the English Channel to the south separating it from continental...
, rent the Vine Cricket Ground
Vine Cricket Ground
The Vine Cricket Ground is one of the oldest cricket venues in England. It was given to the town of Sevenoaks in 1773 by John Frederick Sackville, 3rd Duke of Dorset and owner of Knole House, where the ground is sited...
from Sevenoaks Town Council at a yearly rent of 2 peppercorns which covers the ground and pavilion. The council in return, if requested, gives a new cricket ball to Baron Sackville
Baron Sackville
Baron Sackville, of Knole in the County of Kent, is a title in the Peerage of the United Kingdom. It was created in 1876 for the Honourable Mortimer Sackville-West, with remainder, failing heirs male of his body, to his younger brothers the Hon. Lionel and the Hon. William Edward...
every year.