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The Retail Prices Index (RPI) is a widely used measure of inflation in real estate documents. Its popularity stems from its historically higher increases compared to other measures like the Consumer Prices Index (CPI). However, RPI's methodology has been criticized for producing inaccurate results, leading to it losing its status as a national statistic in 2013.
A joint consultation by HM Treasury and the UK Statistics Authority in 2020 proposed reforms to the RPI methodology. Key changes include:
* Continuing to publish RPI but using CPIH (CPI including owner occupiers' housing costs and council tax) data from February 2030, which is likely to result in lower RPI increases.
* Discontinuing supplementary indices like RPIX.
These changes will not take effect until 2030, but they are relevant now for real estate documents with RPI-linked provisions extending into 2030 or beyond. The implications of these changes include:
* Lower/slower RPI increases, which may discourage the use of RPI in new documents.
* Existing documentation may prompt landlords to request re-gears if there is no substitution provision.
For agreements with RPI provisions extending into 2030 or beyond, consideration should be given to substituting another index or mechanism. This includes assessing:
* The trigger for substitution provisions.
* What the alternative mechanism should be.
* The process for determining that mechanism.
Early review of affected agreements and consideration of index substitution provisions are crucial, particularly for large portfolios where small changes can have significant financial consequences.
