Table of Contents
In Short
-
A Retail Price Index (RPI) rent review adjusts your rent based on inflation, using the official RPI figure published monthly.
-
The review may increase rent in line with inflation, and some leases may include caps or collars to limit the changes.
-
RPI rent reviews are less popular due to recent inflationary pressures, which can lead to sharp rent increases.
Tips for Businesses
If your lease includes an RPI rent review, be prepared for potential rent increases linked to inflation. Check if your lease has a cap or collar to control these changes. If you’re concerned about future rent hikes, consider discussing alternative rent review methods with your landlord or a legal advisor.
When operating a business from physical premises, you will likely enter into a lease with the landlord that outlines the terms of your occupation and use of the property. A key lease section is the rent review provision, which allows the landlord to assess your rental amount periodically. Rent review provisions specify the type of rent review your landlord will conduct, such as an open market rent review or an index-linked rent review. This is common for longer leases and may occur multiple times during the term. One type of rent review is a retail price index rent review. This article will explain what a retail price index rent review is in the UK.
This cheatsheet includes practical tips to understand key clauses and avoid disputes in leasing agreements.
Commercial Lease
A commercial lease is when you have exclusive possession of a property or part of it for a specified permitted business use during a set period. Your rights and obligations are contained in your commercial lease and are often negotiated with the landlord. This contract will contain, for example:
- the lease term;
- the terms of use of the premises;
- repair obligations for the commercial premises; and
- the rental amount you must pay.
Whilst terms of a commercial lease tend not to change throughout the commercial lease, the rental amount may do so. This will depend on whether or not your lease agreement contains a rent review clause, which can take different forms as detailed below.
Rent Review
If you have a rent review clause in your commercial lease agreement, your rent may change throughout the lease period. A rent review is where your landlord assesses the amount of rent you pay according to an agreed method as set out in the lease. Commercial landlords will include rent review clauses to account for future economic factors. For example, increases in general expenditures over time.
The rent review clause should include details on:
- how often a rent review may take place;
- the process of the rent review;
- how to dispute a change to the rental amount; and
- what the landlord bases the rent review on, i.e. how they assess it.
A landlord will generally assess the rent using:
- an open market rent review which, among other factors, looks at the value of properties similar to yours in the area; or
- an index rent review (usually using the Retail Price Index (RPI) as the applicable index).
Other ways the rent can change include:
- turnover rent assessments, where you may have to pay an additional amount of rent because your turnover went above the threshold documented in the lease; or
- fixed or stepped rent increases, where the increase is calculated automatically.
Retail Price Index Rent Review
When a landlord conducts a retail price index rent review, it is based on a specific measure of inflation. This measure is the RPI, which is a monthly published figure from the Office for National Statistics. It reflects the monthly fluctuations in inflation, determined by changes in the prices of goods and services. The percentage change is referred to as the ‘index amount’.
Your landlord typically takes your current rent and multiplies it by the index amount as a percentage. Therefore, if the prices of goods and services have increased by 5%, your rent will also rise by 5%. However, some landlords specify in their rent review clause that there is a cap on the maximum amount the rent can increase, and possibly a collar, which is the minimum amount the rent must rise. This can give tenants more certainty regarding their rental amount throughout the term, as the RPI can fluctuate significantly.
While your landlord will base this type of rent review on the RPI, conducting a similar rent review based on a different index is possible. Combining an RPI rent review with an open market rent review is also feasible.
Key Takeaways
Commercial lease agreements contain many terms, which do not usually change during the term. However, one of these terms, the rental amount, can vary if rent review provisions are included in the lease.
This can vary in a number of different ways, based on the frequency of reviews and the method of calculation. One method is the retail price index rent review, which considers inflation to determine the new rental amount. However, a landlord may cap an increase by an ascertained amount and ensure the rent does not fall below a minimum amount. In fact, this is usually an increase only, and considering the increase in inflation from 2022 onward, they are not a popular choice for tenants.
If you need help understanding retail price index rent reviews in commercial leases in the UK, our experienced leasing lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents for a low monthly fee. Call us today on 0808 196 8584 or visit our membership page.
Frequently Asked Questions
A rent review is where your landlord assesses the amount of rent you pay to ensure that it remains a suitable amount. They will assess this on a specific method of review.
A retail price index rent review is where your landlord bases their assessment of the rent you pay on the inflation of goods and services in the UK. The rent price rises according to the percentage these have risen by.
We appreciate your feedback – your submission has been successfully received.
