Inflation and RPI Proposed Changes

Published on 7 Oct 2022

Not usually a very interesting subject but inflation is something that we have all suddenly become quite familiar with. Inflation rates can be difficult to predict and are liable to change suddenly because of world events, as we have recently seen.

Property documents with reviews and payments are often tied to fixed dates and so will not necessarily be able to adapt quickly to changing trends. Most property documents when linking payments to inflation use an inflation index, the principal measure of inflation in the UK is the Consumer Price Index (CPI).

Another index is the Retail Prices Index (RPI) which measures the average change, month to month, of the cost of specific retail goods and services in the UK including mortgage interest payments. RPI is no longer the principal measure of inflation but remains popular in the property industry, one of the reasons being that annual RPI increases have averaged about 1% higher than CPI.

Why is this an issue?

The government confirmed previously that the UK Statistics Authority (UKSA) could implement changes to RPI after February 2030. A recent judicial review decision has confirmed this decision was lawful. UKSA want to align RPI with the CPIH which is the CPI plus housing costs (i.e. how much a householder would pay rent for an equivalent property; not mortgage payments).

If this happens it is believed that investment values and rent reviews may drop. The consequences arising from the changes will vary depending on what action is taken in 2030.

2030 is still a few years away, so why worry?

Your leases may need to be considered now if they use RPI indexation and will continue beyond 2030.

If you are a landlord, you may want to check the terms of any existing leases that you hold whose term continues from 2030 and beyond, to see if your leases allow for the substitution of an alternative index.

When agreeing heads of terms for a new lease that will remain in force during or after 2030, you should consider how any increases are to be calculated and if an index is to be used, which one? If you are the tenant, this could also impact on you, as the use of any index other than RPI or a combination of indexes, will have tax implications.

There are a lot of points to consider when entering into any contract or document, in particular a lease. Here at Lanyon Bowdler we can advise on many aspects of commercial property including commercial leases.

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