Commercial tenants and landlords should check their leases for CPI escalation rights and calculate accordingly.
Very recently, I was contacted by a shopping mall tenant who sent me a letter of intent for a new lease. The letter of intent included a CPI rent adjustment provision. About the same time (at the end of January), we learned that the inflation rate has now reached 7%, the highest since 1982. I’d never given this much thought until I realized that this will cost the this tenant a fortune.
It is not unusual for commercial landlords to request rent increases to be the greater of: (a) X% (usually, 3%/year) or; (b) a year over year increase in CPI. In my client’s case, I was surprised to learn that this tenant would agree to the provision given the recent inflation announcement.
For years, CPI has been well below 3% so it has traditionally been a no-brainer for tenants to agree to a CPI clause. But now, a new tenant is agreeing to increase rent next year by 7%. Whether this is due to supply chain issues or COVID, tenants are in for some sticker shock. This issue also applies to all of the leases out there with CPI clauses and rent increases coming due in the short term. Those tenants who had been used to routine 2-3% yearly increases will be in for a big surprise over the coming months. Even worse, base rents are now being “set” and will not likely revert back to the pre-inflation rates.
Again, Tenants (and Landlords) need to plan accordingly. If you have any additional questions, feel free to email me at email@example.com or call 602-533-2838.