What Should You Consider Before Agreeing to a Retail Price Index (RPI) Rent Review?

Summary

• An RPI rent review ties your rent increases to the retail price index, meaning your rent rises in line with inflation, which can result in significant cost increases, particularly during periods of high inflation.
• Tenants can negotiate protections such as a cap on increases or a break clause to manage financial exposure under an RPI rent review clause.
• If a dispute arises, the lease’s dispute resolution provision – often involving an independent surveyor – will govern how disagreements about the new rent are resolved.
• This article is a plain-English guide to retail price index rent reviews in commercial leases for business tenants in Australia, produced by LegalVision, a commercial law firm.
• LegalVision specialises in advising clients on commercial leasing matters.

 

Tips for Businesses

Before signing a commercial lease with an RPI rent review clause, check current inflation trends. Negotiate a cap to limit rent increases and consider including a break clause. Review the dispute resolution process so you understand your options if you disagree with a proposed rent increase.

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On this page

• Rent Review 
• Retail Price Index Rent Reviews 
• Key Considerations 
• Key Takeaways
• Frequently Asked Questions

As a tenant with a commercial lease, you occupy a property as your business premises in return for rent. A commercial lease agreement is a legally binding contract between you and your landlord. It details the terms and conditions of your lease, including the lease term and the rental amount. However, the rental amount for your commercial lease can change during your lease if it contains a rent review clause. Rent clauses can vary between commercial leases; some may detail an open market rent review or an index-linked rent review. This article will explain what you should consider as a commercial tenant regarding retail price index rent reviews.

Rent Review 

A rent review occurs when a commercial landlord reviews a tenant’s rent to occupy their property. Depending on the lease’s term, it happens periodically, typically every five years. A rent review usually only results in rent staying the same or increasing

The details of a rent review will be in the rent review clause in the commercial lease agreement. This will state, for example:

• the date the rent review will take place;
• the rent review process (including the way the new rent amount is calculated);
• how you appeal the rent review; and
• what happens in case of late payment of the new rent. 

One type of index-linked rent review is a retail price index (RPI) rent review. 

Retail Price Index Rent Reviews 

A retail price index rent review is a type of rent review that uses the retail price index (RPI). The RPI measures inflation based on the price of retail goods and services. Its figures are published monthly and calculated based on the typical consumer’s spending. Where inflation rises, so do RPI figures, and where it decreases, the same occurs for RPI figures. 

Where RPI determines a rent review, the rent is based on the inflation level when the landlord carries out the rent review. Therefore, the percentage of your rent increase will reflect the percentage increase of inflation. However, this can be calculated differently, and tenants should ensure that the chosen method benefits them. 

Key Considerations 

If, as a commercial tenant, you are about to enter a commercial lease agreement, you should be familiar with any rent review clause. If the lease agreement specifies that the rental amount is subject to change per the RPI, there are key considerations to note.  

Current Inflation Levels

RPI rent reviews mean your landlords will assess the rental amount based on inflation. Consequently, before you enter a commercial lease with an RPI rent review, you should consider current inflation levels. In the past, RPI has mostly stayed the same. However, since 2022, it has risen sharply. This means that your rent may increase considerably. 

Importantly, your commercial lease agreement is a legal contract you must follow. So, if your rent increases and any appeal of this is unsuccessful, you have to commit to a higher rental price.

A “Cap”

If your landlord includes an RPI rent review in the commercial rent agreement, consider negotiating a “cap” on any increase. This means that where inflation suddenly rises rapidly, you can be confident that the rise will never go above a capped figure.

Break Clause

If your landlord wants to include an RPI rent review clause in your commercial lease agreement, you might negotiate to include a break clause so you can exit the lease if the proposed rent increase is too high. Most break dates will be set to occur after the date the review is to occur, but, as you will have a good idea of how RPI is trending, including a break is a good risk mitigation strategy to avoid a sharp rent increase.

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Dispute Resolution

The lease usually includes a dispute resolution provision as part of the rent review clause. Typically, this will consist of appointing a surveyor to review any disagreement on the increased rent. Some leases can also state that the rent increase is at the landlord’s absolute discretion, in which case tenants are bound by the landlord’s assessment except where there is an error, or it is contrary to the law. 

Key Takeaways

An RPI rent review is where your landlord reviews the rental amount you pay in line with the retail price index. The RPI is based on inflation, such as changes to the price of goods and services. As an outcome, your rental costs will change, and you will have to pay an increased cost. 

Before you commit to a lease with an RPI rent review, you should consider recent increases in inflation. Rapidly rising inflation will impact the rate at which your rental amount increases. Therefore, you might wish to negotiate a cap on the rental increase or negotiate the inclusion of a break clause.

If you need help understanding retail price index rent reviews as a commercial tenant, 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.

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