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14 February 20225 minute read

How the proposed reform of RPI may affect real estate documents

What is changing?

The Retail Prices Index (RPI) is due to be reformed to bring it in line with the Consumer Prices Index including owner occupiers’ housing costs (CPIH). The RPI index will be calculated using the same methods and data sources as the CPIH. In short, this means that the way the RPI is calculated will change, but the index itself will continue to be published. However, only the all-items RPI will continue to be published – supplementary indices and lower level indices will be discontinued.

When is the change due to take place?

The change is due to take place from February 2030. However, a judicial review of the proposals to align the RPI with the CPIH is expected to be held in summer 2022 which could alter or delay the proposed changes. The trustees of various pension schemes made a judicial review application because they are concerned that the reform could detrimentally affect the value of RPI-linked assets and result in a lower retirement income for final salary pensioners. In addition, we are seeing investment clients who are looking at longer term secure income driven investments become more focussed on the specific language of RPI based reviews to ensure that their financial modelling is appropriately reflective of any idiosyncrasies and the uncertainty of the current position.  

What does this mean for leases with index-linked provisions?

As a measure of inflation, CPIH has typically been lower on average than RPI. As a result, it is likely that increases linked to RPI after 2030 will rise more slowly once RPI is brought in line with CPIH.

Although RPI lost its designation as a national statistic in 2013, it has continued to be published and used. It is used in some property documents, such as index-linked rent reviews or service charge caps in commercial leases. For any rent reviews which are pegged to RPI, it is likely that increases in rent will rise more slowly after 2030. Similarly, any service charge cap increases which are calculated in line with RPI are likely to rise more slowly. This will generally be good for tenants but less good for landlords.  

  • For new leases (which may last beyond 2030)

Consider whether RPI is still an appropriate index to use, or whether an alternative may suit the parties better.  Would CPI or CPIH be appropriate? Or would a variant of these indices be more suitable, eg CPI or CPIH plus a certain percentage (eg CPIH + 1%), to try to replicate the pre-2030 rates of RPI? In looking at whether the lease may last beyond 2030, remember that a lease with a term which expires before 2030 but which has security of tenure under the Landlord and Tenant Act 1954 may be subject to statutory renewal and the renewal lease could extend beyond 2030 on the same or similar terms.

  • For existing leases

Check the provisions of any index-linked rent review schedules or service charge caps in leases to establish whether they use RPI. Many index-linked rent review provisions (and service charge cap provisions) contain a clause which allows the parties to use a different index if the chosen index ceases to be published. These clauses will not be triggered if the review is linked to the all-items RPI index (as opposed to one of the supplementary or lower level indices) as, although the methods being used to calculate the index are changing, the all-items index will continue to be published. However, other clauses may include wording allowing the parties to use an alternative index if there is a change in the way the current index is compiled, which seem more likely to be triggered by this proposed reform. Each lease will depend on its own terms.

  • SDLT treatment of index-linked reviews

Where tenants are required to pay SDLT on leases, any increases in rent linked to RPI are generally ignored for SDLT purposes provided that the increase is linked solely to RPI. At present, increases linked to another index such as CPI or CPIH, or which are based on RPI plus or minus a percentage, would not be ignored. This broadly means that, if an index-linked rent review that is not solely linked to RPI occurs during the first five years of the term, the tenant is obliged to make a reasonable estimate of the rents payable under the lease taking into account the expected impact of any index-linked rent review, to pay SDLT on that sum and to make an adjustment after five years (or at lease expiry, if earlier) to reflect the actual rents paid during the first five years of the term. If parties decide to opt for index-linked rent increases which are not solely linked to RPI as a result of these proposals, tenants should be aware of this SDLT treatment.

If you have any questions on this, please contact Omer Maroof or Bonnie Calnan, or your usual DLA Piper contacts.