Landlords: Don’t Forget About CPI Index Clauses
On January 12, 2022, the Bureau of Labor Statistics published the Consumer Price Index for December 2021, which increased 7.0% from December 2020. This is great news for landlords who use a CPI index clause that adjusts rent to correspond with changes to inflation, as opposed to a flat percentage increase (e.g., 3% increase per year). With the return of inflation, landlords should ensure that any current leases containing CPI clauses are being accurately enforced and consider incorporating them into future leases.
There is no standard CPI clause, and specific care should be given so that the clause is carefully tailored to the terms of the lease, including:
- The selection of a base month. When selecting which month to use to calculate the annual change in CPI, will the monthly index be available at the time of the calculation? (Usually an index for any given month will be published on the 10th day of the next month.)
- The selection of a specific index. The most common index is the CPI for “All Urban Consumers,” but there are a variety of other indexes specific to various goods or industries.
- Timing of adjustment. Will the CPI adjustment occur annually? Every three years? Will the adjustment occur during any renewal term?
- Caps. Sometimes CPI clauses are capped with either a minimum or maximum. For example, if the CPI increases by 7%, should tenants request that rent be capped at 5%? If the CPI increases by only 1%, should landlords request the rent increase by 3%? What happens in the unlikely event CPI decreases?
A CPI clause for a lease that commences on June 1, 2022, might look like the following:
“Beginning on June 1, 2023, and occurring on the same date of each year thereafter until the expiration of the Term or earlier termination of this Lease, the Annual Rent will be increased cumulatively by the greater of: (i) percent ( %) or (ii) the annual increase in the CPI, as calculated in accordance with this Article. For the purposes herein, “CPI” means the CONSUMER PRICE INDEX for all Urban Consumers (All Items U.S. City Average 1982–84 equals 100), published by the Bureau of Labor Statistics, United States Department of Labor. For the purposes of determining the annual increase in the CPI, subtract 1 from the fraction whose denominator is the monthly CPI number for January of the calendar year prior to the calendar year that the determination of the annual increase in the CPI is being made and whose numerator is the corresponding monthly CPI number for January of the calendar year in which the determination of the annual increase in the CPI is being made. By way of example, and not as a limitation, if the monthly CPI number for January 2022 were 230 (denominator) and the monthly CPI number for January 2023 were 237 (numerator), then 1 subtracted from the fraction would mean an annual increase in the CPI of 3 and 4/100 percent (3.04%). Thereafter, the annual increase in the CPI for each 12-month period of this Lease will be computed in a like manner and calculated cumulatively. If the monthly CPI number is not available during any calendar month required for determination of the annual increase, then the Annual Rent will be increased 3 percent (3.0%), as set forth herein, until the appropriate monthly CPI becomes available, at which time the increase above 3 percent (3.0%), if any, will be retroactive to the beginning of the period and be immediately due and payable to Landlord as rent. In the event that CPI is terminated or unavailable for any reason, the calculation will be made by using the successor index or the one most nearly comparable to it. Notwithstanding anything contained in this Article to the contrary, the Annual Rent will not increase more than ___ percent ( %) between each anniversary of the Commencement Date.”
It is now more important than ever that you understand how the CPI index impacts your lease. Attorneys at Williams Parker can assist you in interpreting a current CPI clause or negotiating the correct CPI clause in your prospective lease.