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RPI is the headline rate of inflation which is announced by the Government each month. In the March 2020 budget, proposals were published to address the shortcomings of RPI which, it is thought, often overestimates or underestimates the rates of inflation.
This change was originally proposed to take place in 2030, but there is now the possibility that this will be brought forward to as early as 2025. The Government consultation together with the UK Statistics Authority is underway and was due to close at the end of April but the consultation period has been extended and will now close on 21 August 2020.
In 2013, the Authority judged that the RPI did not comply with the Code of Practice for Statistics and is considered a poor measure of general inflation. However, the RPI figure has continued to be used widely in the economy. The Consumer Prices Index was introduced in 1997 and does not suffer from the same shortcomings as the RPI. In 2017 the Office for National Statistics introduced a new index, CPIH, which adjusted the CPI to include the cost of living in and maintaining one’s own home.
Since 2017 CPIH has been the lead measure of inflation. In 2012 the National Statistician ran a consultation on the options for change to the RPI as a result of a widening wedge between RPI and CPI results. As a result of various enquiries and consultations in 2019, the then Chancellor, conceded that there were shortcomings with the RPI and the current public consultation began.
There is no impetus by the Government to remove the requirement to publish the RPI only to address its shortcomings. The proposed statistical changes will bring RPI more in line with CPIH but the two indices will continue to be calculated and published separately. It is suggested, that based on recent experience, this would see the annual measured rate of inflation lowered by about 1 percentage point per annum.
This will particularly have an impact on the following 3 areas:
The RPI is most commonly found in property transactions in index-linked rent reviews. In leases where the rent review is due to increase in line with RPI rates, it is likely that the proposed change to bring RPI in line with CPIH will negatively impact the landlord’s position as the review will be against a lower rate of inflation, which in turn will mean the investment value of the property will drop. The change is due to affect leases with reviews which will be due when the government releases which date it will be implemented.
Typically, clauses which make reference to the RPI also contain provisions to allow for an alternative index to be substituted if there is a material change to the way RPI is calculated. Landlords may wish to consider whether these provisions might reasonably be used if there are any changes over the coming years in order to maintain the increase that they initially had in mind when granting the lease. However, it is unclear whether the change will equate to a ‘material change’, and tenants may challenge attempts to exercise these provisions, allowing scope for contention.
Landlords should be mindful of the proposed changes, and if commercially acceptable with their tenant may wish to set the rate at CPIH + a given percentage, rather than use RPI.
SDLT is payable when the transaction first takes place, and the calculation will take into consideration any changes to the rent payable within the first five years. Where leases contain a rent review (within the first five years) which is based on the RPI rate, the SDLT will not take the increase into account as it is an “excluded adjustment”.
Where the review (if in the first five years) is due to be based on CPIH, it is not excluded and therefore usually means there is a higher amount of SDLT payable. There is uncertainty whether this will alter in light of the proposed change to the RPI rate.
Similar to rent reviews, capped service charges usually increase in line with the RPI to reflect the increase in cost to the landlord for providing such services. Landlords may wish to consider any outgoings and expenditure which they might want to exclude from the cap to ensure that they do not suffer any shortfall for services provided. Again, this is something to be negotiated with the tenant.
Should you require any further information regarding how the proposed changes may impact the provisions in your lease, you can contact our Commercial Property Team on 0161 941 4000 or email The Commercial Property Team.