CPI rent reviews in the context of higher inflation

• Published date: 23 November 2022
• Subject Matter: Real Estate and Construction, Landlord & Tenant - Leases
• Law Firm: Cavell Leitch
• Author: Mr Elliot Scott

After a sustained period of relatively low and benign Consumer Price Index (CPI) rises, the current inflationary environment and higher increases in the CPI has put CPI rent reviews in leases back in the spotlight. It is therefore timely to consider how they work and, given their potential impact, to consider them more closely when negotiating new leases.

On a CPI rent review the rent payable under the lease is adjusted by the change in the Consumer Price Index from the CPI quarter before the previous rent review and the CPI figure for the quarter before the current rent review date. By way of example, where the CPI has increased by 7% over the previous year this would result in an annual rental of $100,000 increasing to $107,000 annually. Generally, rent can't fall below the rent payable immediately before a CPI review date, however this does depend on the terms of the particular lease.

CPI rent reviews have traditionally been viewed by Landlords and Tenants as a way of providing some certainty as to rent increases with annual CPI increases having often been around 1% - 2.5%. However, recent CPI increases of over 7% have led to higher than expected rent increases. Another benefit of a CPI review (as opposed to a market rent review) is that it avoids the parties having to obtain costly market valuations and the increase in the CPI can't be disputed.

CPI reviews don't account for any increase in the value of the specific property and therefore CPI...