In brief

On 25 November 2020, HM Treasury and the UK Statistics Authority (UKSA) issued their joint response to the consultation on the reform of the Retail Prices Index (RPI).

As a consequence of RPI being used as the reference index in some government debt, the consent of the Chancellor of the Exchequer is needed for changes to RPI if they take place before 2030 (when the last of this debt matures).

The Chancellor has said that consent will not be given to changes before 2030. From 2030, the UKSA can make changes to RPI without HM Treasury consent. The UKSA have said that from 2030, they will reform RPI and align it with CPIH (the Consumer Prices Index including owner-occupiers' housing costs). They will discontinue the supplementary and lower level indices of RPI and bring the methods and data sources of CPIH into the RPI.

In summary

  • It is relatively market standard to include RPI-linked rent review provisions in real estate documents.
  • When negotiating new real estate documents, or acquiring a property where subsisting documents contain index-linked reviews or calculations, parties need to consider the position post-2030, when RPI will be aligned with CPIH. This alignment may result in lower-than-expected increases in rents.

In detail

RPI is Britain's oldest measure of inflation, but its accuracy has now been under question for several years. However, its inclusion in real estate documents is still relatively market standard.  RPI indexation can be found in many real estate documents, such as:

  • leases – service charge or other caps may be indexed, and rent review may be calculated on an index-linked basis;
  • development agreements – some ensure that base costs are indexed; and
  • overage clauses – these may include indexation in the formulae.

RPI is still the preferred index for these purposes because it runs higher than CPI (the Consumer Prices Index) or CPIH and so generally presents more favorable (i.e. higher) increases following any index-linked review.

Additionally, in the context of leases, HMRC excludes any RPI increases when calculating the rent payable, and so it is not treated as an unascertainable or uncertain rent for the purposes of the SDLT calculation. This results in a possibly lower SDLT payment than for rent reviewed by other indexes, which is a better SDLT outcome for tenants.

Parties entering into a lease with indexed rent review with a term longer than 10 years (or any other document with indexation that runs beyond 2030) now need to consider this 2030 change to RPI. 

It may be prudent to include a different index in the review provisions, depending on the frequency of pre-2030 reviews. Alternatively, the parties may wish to include provisions allowing for a replacement index.  The bar for replacement of the relevant index is often set high in standard form drafting, and the parties may wish to revise this in contemplation of the 2030 change.

In any 1954 Act renewal negotiations, or in any reversionary lease, Landlords should consider including a different index as a “market update" to the original lease, to avoid future uncertainty.

Anyone acquiring a property subject to documentation with pre-existing indexed rent review, with a term running past 2030, will need to undertake careful due diligence. If RPI ceases to be published altogether post-2030, this may present problems if the lease does not include provisions for a replacement index. If RPI is still published but is aligned at the level of CPIH, then rent increases may be lower post-2030 if the reference base is not changed.