Retail Price Index (RPI) is the oldest measure of inflation in the UK and is used widely across the economy and in financial contracts. However, the means by which it is calculated no longer meets current international statistic standards. This has meant that RPI has not been classed as an official statistic since 2013 because it is not fit for purpose, causing it to be, on average, 1 percentage point higher than it should be.
Proposals for RPI Reform
In 2019, the Office for National Statistics (ONS) put forward two proposals to the Chancellor which were:
- to cease publication of RPI at some point in the future, though it was noted that it would require the Government to bring forward primary legislation and also take some time to implement given the wide use of RPI;
- to address the shortcomings of RPI in the short term, by bringing methods and data of Consumer Price Index including owner occupiers’ housing costs (CPIH) into it.
Consumer Price Index (CPI) does not suffer from the same shortcomings as the RPI. However, CPI does not include a measure of owner-occupiers’ housing costs which is the cost of living in and maintaining one’s own home. The ONS introduced CPIH in 2013 to address this and it has been the ONS’s lead measure of inflation since March 2017.
In September 2019, the Chancellor ruled out the first proposal, and announced that he would not provide consent to making the change for the second proposal before 2025, but would consult on the timing for bringing the methods and data of CPIH into RPI. This consultation was announced at the Budget on 11th March 2020, and while the Chancellor sees the statistical arguments, he will be unable to offer his consent before the maturity of the final specific index-linked gilt in 2030.
The ONS has sought clarification that, although the Chancellor’s assessment will be more straightforward when they come to assess RPI in February 2030, consent will still be required at this stage.
Practically speaking, the consultation confirmed that the ONS will continue to produce RPI as a separate measure, but will use robust methods and data similar to that used for CPIH when authority is received to address the shortcomings of RPI.
What is the Impact on the Commercial Property market?
RPI is used in real estate transactions for four main reasons:
- Index-linked rent reviews;
- Index-linked service charge caps;
- Re-basing a purchase price when calculating overage;
- Option agreements and condition sale agreements.
Given that it is usually higher than CPI, it is the preferred index in real estate transactions.
An option that landlords could consider going forward would be to introduce minimum and maximum increase to rent reviews to ensure that rent continues to increase even if RPI is significantly reduced.
Alternatively, for new transactions, parties should consider what index link to use and may even consider linking to CPIH + 1% to reflect current RPI, but all parties will need to be in agreement. Any index can be used but it is important to ensure that the index is published monthly and available without charge.
Going forward, surveyor input should be sought at an early stage in new lease/overage/sale negotiations as to which appropriate index to refer to. Consideration should also be given to include the ability to use a different index if RPI is based on a fundamentally different calculation. However, please bear in mind that these provisions are largely untested and as an example, in lease transactions a landlord may look to use these provisions but tenants looking to lower increases may attempt to challenge the provisions.
Many legal documents may already contain provisions allowing reasonable adjustments to the RPI figures or to substitute an alternative index if there are fundamental changes in the methods to calculate RPI. However, it is worth reviewing these and certainly considering these clauses in any documents you enter into going forward.
It is important during this period to ensure that any index linked rent review clauses are drafted with the upcoming changes in mind.
If you are considering granting a new lease, or entering into an overage/option agreement with an index linked clauses, we can ensure provisions are included for when RPI materially changes. Please contact Marina Banks, Solicitor, on 0161 475 7604 or email [email protected] to find out more.