Partner Katja Wigham, in our Commercial Property team, explains the impact of a realignment of the Retail Price Index (RPI) on landlords and tenants.
In the March 2020 budget, the Government published proposals to reform the shortcomings of the Retail Price Index (RPI) by aligning the RPI with the Consumer Price Index plus housing costs (CPIH). The consultation period has been extended until 21 August 2020 because of the Covid-19 pandemic to allow businesses sufficient time to consider and comment on the proposals.
However, what appears certain, is that RPI as we know it will be phased out, possibly as early as 2025.
Why is this relevant to the property sector?
RPI and commercial leases
It is not unusual for commercial leases, particularly shorter, lower value leases, and leases in certain sectors to include rent reviews by reference to changes in the RPI. RPI is usually slightly higher than CPIH (about 1%) and therefore preferred by Landlords. Landlords may therefore see rent levels drop and should be reviewing their existing lease portfolio to consider the effect of any change. Whilst most leases will provide for a replacement index to be used, there may not be an index of equal benefit to a Landlord. There may also be differences of opinion as to which replacement index should be used.
For new leases, with rent reviews after 2025 Landlords should be considering what index/replacement index to use. Whilst CPIH + 1% may seem attractive, this may be resisted by a Tenant because of the potential stamp duty land tax (SDLT) implications set out below.
For a Tenant, phasing out of the RPI may be most felt in relation to SDLT. Whilst rent reviews which occur after the first five years of the term are, as rule, ignored, rent reviews occurring during the first five years of the term may trigger a requirement to submit a further Land Transaction Return to HMRC and to pay additional tax. RPI reviews are excluded from this additional requirement (although any reviews such as RPI+1% are not). Therefore, unless any reform of RPI includes a similar exclusion for the replacement index, tenants may find themselves with the additional burden of having to submit further returns and to pay additional tax.
RPI and service charge
If a lease contains a service charge cap, the cap is often increased in line with increases in the RPI to reflect the increased cost to the Landlord over the term of providing those services. Landlords should therefore consider what other index or method of increasing the service charge is appropriate.
RPI and property contracts
RPI is sometimes used in property contracts, particularly development contracts, where completion may be deferred for some months or even years or where additional sums (overage) may be payable in the future. RPI is added to the deferred payment when made to reflect the reduction in value in of the price originally paid or agreed. Again, such contracts are likely to contain provision for a replacement index but as with leases, this may not give an equivalent return. Sellers should therefore carefully consider which index should be used.
Those involved in the property industry should begin to consider the changes to RPI now and to prepare. They may also wish to take part in the consultation.
For further information or legal advice, please contact law@blandy.co.uk or call 0118 951 6800.
This article is intended for the use of clients and other interested parties. The information contained in it is believed to be correct at the date of publication, but it is necessarily of a brief and general nature and should not be relied upon as a substitute for specific professional advice.
