RIP RPI: Why the Retail Prices Index is disappearing from leases

The Retail Prices Index (RPI) has long been a fixture in UK property transactions, particularly in commercial leases. It has recently hit the headlines for also being used in calculating interest rates for UK student loans. However, its status as an official measure of inflation is declining. This article explains its decline and why Landlords need to act sooner rather than later to account for this.

What is RPI?

RPI is a measure of inflation published by the Office for National Statistics (ONS). It tracks the average change in the cost of a basket of retail goods and services, including mortgage interest payments. Historically, RPI was the UK’s principal inflation index, but it has been replaced by Consumer Price Index (CPI) for most official purposes. RPI is typically about 1% higher per year than CPI, largely due to differences in calculation methods and the inclusion of housing costs.

Why is it declining?

In 2013, the ONS stripped RPI of its status as a national statistic, citing methodological flaws. In December 2020, the government announced that changes will be made to bring the methods and data sources used to compile the Consumer Prices Index, including owner occupiers housing costs (CPIH), into RPI. These changes will not be made until after February 2030 and they are intended to address the recognised shortcomings in the way RPI is compiled. The changes are expected to result in RPI inflation being lower than it otherwise would have been. The ONS have not confirmed whether they will stop publishing the RPI or nominate an alternative index as its official replacement.

Why is RPI used in leases?

RPI is popular in the property industry for several reasons:

• Legacy: Many existing leases use RPI for index-linked rent reviews and service charge caps.
• Higher increases: RPI’s tendency to rise faster than CPI means landlords often prefer it for upward-only rent reviews.
• Familiarity: RPI has been the standard for decades, and parties are comfortable with its behaviour and impact.

How is it used?

• On rent review, for example, the rent is reviewed every five years by reference to the RPI.
• For service charge provisions involving a cap, it is usual for the cap to increase in line with RPI.

Many leases allow for a replacement index if the RPI is discontinued or materially changed. However, not all leases are clear on when or how to switch indices, which could lead to disputes.

What should landlords do?

• Review existing leases for flexibility on indexation and substitution clauses.
• Consider using CPI or CPIH for new leases. Neither is a perfect substitute for RPI’s historical behaviour. Alternatively, a combination of CPIH and a prescribed percentage increase may bring it closer to the levels of RPI, for example CPIH + 1% or even 2%.
• Include robust dispute resolution provisions to address potential changes to RPI.
• Stay informed about legislative and statistical changes affecting inflation indices.

Conclusion

Landlords must be aware of the risks and ensure their documents are future-proofed against changes to RPI. As the market evolves, CPI and CPIH may become the new standard, but careful drafting and negotiation will remain essential.

If you would like advice on transitioning to alternative indices, please contact us.