RPI reforms – What is the big change?
The Retail Price Index (RPI) is due to be transformed to bring it in line with the Consumer Price Index including occupiers’ housing costs (CPIH). The RPI index will be calculated utilising the same strategies and information sources as the CPIH.
In brief, this implies that the way the RPI is calculated will alter. The index will itself continue to be circulated. However, as it were, the all-items RPI will proceed to be distributed – supplementary indices and lower level indices will be dropped.
When will the RPI reforms take effect?
We still have some way to go! The proposed reform of RPI will take place from February 2030. In any case, a judicial review of the proposition to adjust the RPI with the CPIH is anticipated to be held in summer 2022 which may modify or delay the proposed changes. The trustees of numerous pension schemes submitted a judicial review application since they are concerned that the change could adversely influence the value of RPI-linked assets and result in a lower retirement pay for final salary pensioners. In expansion, we are seeing venture clients who are looking at longer-term secure income-driven investments end up more focussed on the particular language of RPI-based audits to guarantee that their financial model is fittingly intelligent of any peculiarities and the instability of the current position.
What are the practical implications for leases with index-linked provisions?
Typically, CPIH has been lower on average than RPI. As a result, it is likely that increments connected to RPI after 2030 will rise more gradually once RPI is brought in line with CPIH.
Although RPI lost its title as a national measurement in 2013, it has continued to be circulated and utilised. It is utilised in property documents, such as index-linked lease rent reviews or service charge caps in commercial leases. For any rent reviews which are linked to RPI, it is likely that increments in rent will rise more gradually after 2030. Additionally, any service charge cap increments which are calculated in line with RPI are likely to rise more gradually. This will for the most part be great for tenants but less so for landlords.
Practical considerations for new leases (which may last beyond 2030)
- Consider whether RPI is still a suitable index to utilise or whether a different method may suit the parties better.
- Would CPI or CPIH be suitable?
- What about a variation of those lists plus a certain rate e.g. CPIH + 1%. This would seek to reproduce the pre-2030 rates of RPI.
It is worth noting that a lease that may last beyond 2030 or a lease with a term that expires before 2030 but which has security of tenure under the Landlord and Tenant Act 1954 may be subject to statutory renewal and thus the renewal lease could extend beyond 2030 on the same or similar terms i.e. same rent review provisions.
Practical considerations for existing leases
- First check the lease provisions for any index-linked rent review schedules or service charge caps to establish whether they utilise RPI.
- Many index-linked rent review provisions and service charge cap provisions contain a clause that permits the parties to utilise an alternative index in case the chosen index ceases to be circulated. These clauses will not be activated if the review is linked to the all-items RPI index (as opposed to one of the supplementary or lower-level indices), as in spite of the fact that the strategies being utilised to calculate the index are changing, the all-items list will continue to be circulated.
- Be that as it may, other clauses may incorporate wording permitting the parties to use a different index if there is a change in the way the current index is compiled, which appear more likely to be activated by this proposed change. Each lease will depend on its own terms.
SDLT treatment of index-linked reviews
Where tenants are required to pay SDLT on leases, any increments in rent connected to RPI are for the most part disregarded for SDLT purposes given that the increment is connected exclusively to RPI.
Currently, increments connected to another index such as CPI or CPIH, or which are based on RPI plus or minus a percentage would not be disregarded. This broadly implies that, on the off chance that an index-linked lease rent review that is not exclusively connected to RPI occurs amid the first five years of the term, the tenant is obliged to form a sensible appraise of the rents payable under the lease taking under consideration the anticipated effect of any index-linked lease rent review, to pay SDLT on that entirety and to make an adjustment after five years (or at lease expiry, if before) to reflect the actual rents paid during the first five years of the term.
On the off chance that parties choose to decide on index-linked lease increments which are not exclusively connected to RPI because of these reforms, tenants ought to be aware of this SDLT treatment.
In short, the SDLT position for the various indexed based rent reviews is as follows:
- RPI only – disregarded for SDLT purposes
- RPI plus/minus X% – SDLT applicable
- CPI– SDLT applicable
- CPIH – SDLT applicable
This is not legal advice; it is intended to provide information of general interest about current legal issues.