How Consumer Price Index Tied Leases Impact Lessees

While everyone is complaining about the cost of fruit and veggies and the cost of living in general, spare a thought for those lessees who are on leases tied to the Consumer Price Index (CPI).

CPI is a measure of inflation for New Zealand households and records changes in the price of goods and services. CPI has traditionally been sitting around 1-2% per year, but with the cost of goods and services, housing, construction and labour all increasing, the CPI is now sitting at 7.2%.

A standard Auckland District Law Society (ADLS) lease generally records two types of rental increases:

1. A market rental increase where after an agreed period of time (say 3-5 years), the rent is assessed against market conditions, often by a valuer, and a fair market rent is agreed on by the landlord and the tenant.

2. Rental increases can also be linked to CPI. Some leases have both mechanisms, CPI adjustment each year and then a market rent review after an agreed period of time.

The beauty of having a CPI rent increase is that the landlord knows he/she will get rental growth each year, thus increasing the value of their property (even if it is only 1-2% growth), while a tenant can factor in advance the 1-2% rental increase each year and plan for it.

When inflation is running rampant, and CPI is 7-8%, a landlord is quite within their rights to increase the rent by 7-8% each year. That means on a $100,000 lease, if CPI is 7.2%, the rent could go up to $107,200 in that year and then by whatever the CPI is the next and subsequent years.

Award-winning Tauranga-based Commercial realtor, Philip Hunt of Property Brokers, believes while CPI rent increases are good in some situations, CPI does not work in others.

“In Tauriko Business Estate, some rents are going up 30% every second year, so we seldom see landlords wanting CPI, even at 7.2%. Why would they when they are getting a 30% lift every couple of years at review time?”

Hunt is quick to point out that things are starting to level off now, however, and that often, in uncertain times like these, where tenants and business people are doing it hard, astute landlords are working with tenants to mutually agree on something that is fair and reasonable regarding lease provisions rather than strictly enforcing the letter of the law. In this way, goodwill and trust are built up, and both parties end up benefiting in the long term via a fair and reasonable long-term lease.

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