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How is Index-Linked Rent Review calculated?

An Index-Linked Rent Review is a lease provision that adjusts commercial rent at defined intervals in line with a published economic index typically the Consumer Price Index (CPI) ensuring that rental income keeps pace with inflation throughout the lease term. It is a widely used mechanism that balances landlord income protection with tenant cost certainty.

How Index-Linked Rent Review Is Calculated

  • New Rent = Previous Rent × (Current Index ÷ Base Index at Commencement or Last Review)
  • The index used (CPI, RPI, or sector-specific index) is defined in the lease
  • Reviews typically occur annually or every 2 to 3 years on specified review dates
  • Collared reviews may include a floor (minimum increase) and cap (maximum increase) to limit volatility

Types of Index-Linked Review Structures

  • Pure CPI Linkage: Rent increases or decreases in exact proportion to CPI movement most transparent method
  • Collared CPI: CPI movement capped between a floor (e.g., 2%) and ceiling (e.g., 5%) to protect both parties
  • Base Plus CPI: Fixed base rent plus a CPI-linked escalation component providing additional income floor
  • Sector-Specific Index: Industrial leases may link to construction cost or logistics sector indices rather than general CPI

Benefits for Landlords and Tenants

  • Landlords receive automatic inflation protection without the cost and uncertainty of market rent review negotiations
  • Tenants can budget accurately with predictable rent escalation linked to a known and transparent index
  • Index-linked reviews eliminate rent review disputes that can arise from subjective market rent assessments
  • Long-term leases with CPI linkage maintain real income value for landlords over extended periods

Index-Linked Rent Reviews are a fair, transparent, and commercially efficient mechanism for managing rent escalation in long-term commercial leases. Landlords and tenants who understand the calculation methodology and structure of their index-linked review provisions are better equipped to forecast their financial obligations accurately and negotiate appropriate collar ranges that balance inflation protection with cost certainty.

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