A rent review clause allows a landlord to reassess the annual rent payable by the tenant during the lease term.
There are various types of rent reviews but our focus in this article is on rent reviews which link rent increases to the Retail Prices Index (RPI).
RPI review clauses adjust the annual rent by the same percentage as the RPI has increased over the review interval. The RPI in the UK is worked out by the Office for National Statistics (ONS). You can find historical prices from the Office for National Statistics (ONS) via their website (Inflation and price indices - Office for National Statistics (ons.gov.uk)).
Rent adjustments based on RPI ensure that the lease remains aligned with changes in the cost of living. RPI review clauses may assist the landlord and the tenant who can anticipate rent. However, inflation rates can be difficult to predict and are liable to change suddenly because of world events. To protect themselves from drastic inflationary fluctuations the landlord and the tenant may agree the introduction of caps and collars in the lease. A collar will ensure a minimum level of increase (protecting the landlord) and a cap will ensure a maximum limit on the increase (protecting the tenant).
It is worth noting that other indices such as Consumer Price Index (CPI) and Consumer Price Index and Housing including owner occupiers’ housing costs (CPIH) may be used in rent reviews however, currently the most used index remains RPI.
That being said, there are currently proposed changes to the RPI, and it is unclear whether after 2030 the ONS will stop unofficially publishing the RPI, whether they will retain the index but change its methodology, or whether they will nominate an alternative index as its official replacement.
The consequences to lease documents will vary depending on the action taken in 2030. If the RPI is still published but calculated differently, documents will be able to continue using RPI but the outcomes will be different. If the index ceases entirely, parties will need to agree which alternative index they are using (if the ONS, or the property document in question, has not specified this).
If you have an existing lease which provides for use of the RPI indexation during or after 2030, you should ask a legal advisor to check if the RPI linked provisions allow for the substitution of a replacement index in certain circumstances, such as if the RPI index is no longer published, or if using the relevant index fundamentally alters the calculation of the indexed figure, or if another method of indexation can be used.
If you are entering into a new lease and are considering linking the rent review to the RPI index, you should discuss with a legal advisor:
- the impact of the proposed changes to RPI on payment of Stamp Duty Land Tax and Land Transaction Tax;
- what provisions may be made in the lease to protect you from the possible changes to RPI; or
- discuss the use of alternative indices and their impact on rent review.
Remember that the choice of which type of rent review to use in your lease depends on various factors, including market trends, lease terms, and the parties’ preferences.
If you wish to discuss this further, or if you have any other landlord and tenant law enquiries, please contact Diana Sarghea of Rowberrys on 01344 959164 or d.sarghea@rowberrys.co.uk.