There has been much comment in the last couple of years on whether the Retail Price Index (RPI) as a key measure of inflation in the UK should be replaced entirely by CPIH (the Consumer Price Index (CPI) plus a housing element).
By way of background, RPI lost its status as a national statistic back in 2013 and it is considered by the Office for National Statistics to be a poor measure of inflation, at times greatly overstating inflation. From rent reviews to train fares, many increases are by reference to RPI. However, by way of comparison CPIH is about 1% lower than the RPI inflation rate. The government plans to align RPI with CPIH between 2025 and 2030. On 13 January 2020, it announced that the consultation on the precise timings for the proposed changes will launch on 11 March 2020 with a response to be announced before the Parliamentary summer recess.
Whilst a reformed RPI measure is arguably fairer, landlords continuing with RPI rent reviews in their leases are likely to see lower rent increases in the years to come. Careful consideration will need to be given as to whether rent reviews in leases should be by reference to RPI, the open market rent, or to some other index such as the RPIJ (that more closely tracks land values). Although currently running at a higher indexation, tenants whose rent is reviewed in line with RPI do benefit from an SDLT concession when calculating Stamp Duty Land Tax (SDLT). Any RPI rent reviews within the first 5 years of a lease are disregarded for SDLT purposes. This is not the case under other indexed rent reviews.
There are therefore advantages for both landlords and tenants in continuing to link rent reviews to RPI However, given the governments stated plan to align RPI with CPIH, until the response to the consultation is issued, it will not be clear what form RPI will take beyond 2025. It is therefore important that any leases that are being entered into now (that will last beyond 2025), carefully consider whether RPI rent reviews are the most appropriate method of review. If RPI is used as a method of review, it would be wise to incorporate appropriate drafting into leases to ensure that if RPI is abolished, a suitable alternative index can be substituted.
Accordingly, both landlords and tenants will have to wait for the results of the consultation to see how quickly and in what form the aligned RPI will take.