How will commercial leases be affected by the reformation of the Retail Prices Index?
The Retail Prices Index (RPI), often referenced in commercial leases, is an older measurement of inflation that calculates the cost of living and wage escalation is due for reform which landlords and tenants need to be aware of.
From February 2030* the calculation of the RPI is due to be reformed to use the same methods and data as the Consumer Prices Index (CPI). The Consumer Price Index (CPI) is the official measure of inflation of consumer prices in the UK. It is also called the Harmonised Index of Consumer Prices (HICP) and includes owner occupiers’ housing costs (CPIH).
Following this change, the ‘all items’ RPI’ will continue to be published but the supplementary indices currently shown will cease.
But you may be asking, how will the reform of the Retail Prices Index affect commercial leases?
Whilst the Retail Price Index is not considered an official inflation rate by the government, it is included in many commercial leases due to the fact it tends to produce a higher figure than increases linked to CPIH.
It tends to be referenced in index-linked rent reviews or service charge caps in leases of commercial properties. As such, any provisions contained in documents that last beyond 2030 are likely to result in lower increases than originally anticipated, which may come as a disappointment to some landlords.
In view of the above, parties to commercial leases likely to extend beyond 2030 should consider the most suitable index to use or whether CPIH, plus a certain percentage, should be used to counter the likely reduction in growth. There may also be stamp duty and land tax implications where rent reviews are based on indexes other than RPI.
At GA Solicitors our commercial property team specialises in advising on commercial leases and can advise both landlords and tenants on how these changes to the Retail Prices Index will affect them as well as make any necessary updates that may be required to their standard commercial lease terms.
*Although the RPI change is planned from February 2030, it may be delayed by an expected judicial review of these proposals.