RPI: Time to say goodbye?

The Retail Prices Index (RPI) is the oldest measure of consumer prices in the UK. From February 2030, the methodology used to calculate the RPI will be fundamentally reformed, bringing into the RPI calculation the methods and data sources of the Consumer Prices Index including owner occupiers' housing costs (CPIH). 

Whilst the RPI has long since lost its status as a national statistic, it remains in common use in commercial contracts, including in the real estate sector. Many commercial leases and related agreements reference RPI as the basis for indexation of future sums. Rent review provisions, service charge escalation clauses, and other periodic payment mechanisms commonly incorporate RPI-linked uplift formulae.

For those with an interest in such agreements, this change has significant practical implications that merit careful attention now.

What Is Changing?

From February 2030 the RPI will be aligned with the CPIH. In practical terms, this means the RPI will no longer be calculated using its existing methodology, which has historically produced a higher rate of inflation than the CPIH (typically by around 0.9 percentage points per annum). 

Whilst the RPI will continue to be published, it will effectively track the CPIH growth rate rather than the legacy RPI measure. Payment obligations linked to RPI are therefore likely to see a slower rate of increase beyond 2030 than would have been the case had the existing methodology continued.

What can you do to prepare? 

Review existing agreements. Both landlords and tenants should audit their current lease portfolios to identify which obligations are tied to the RPI and to understand the likely financial impact of the transition. Existing agreements may make provision for the substitution of an alternative index in certain circumstances, but the substitution trigger should be carefully examined. A clause that allows an alternative index to be used where the RPI ‘ceases to be published’ would appear unlikely to be engaged by the proposed changes. On the other hand, ‘a material change in the calculation methodology’ (or similar) would appear to apply. In the absence of substitution provisions, there may still be scope to renegotiate or vary the relevant indexation provisions by agreement in order to substitute an alternative index or agree a separate review mechanism such as open market reviews or fixed uplifts.  

Consider indexation provisions in new agreements. For leases and other agreements being negotiated now, careful thought should be given to the choice of index. Parties may wish to consider referencing the CPIH, or another index (or variations of them, such as CPIH plus 1%), rather than the RPI, to avoid any ambiguity arising from the 2030 transition. Alternatively, agreements might incorporate fallback mechanisms that cover what will happen when the 2030 changes kick in. 

Next Steps

The RPI reforms are likely to result in lower annual increases than would otherwise have been the case. Over time, this could have a meaningful cumulative effect on income streams and asset valuations. Affected parties should take stock of their position before the changes take effect. Early review and, where appropriate, proactive engagement with counterparties will place you in the strongest position ahead of the transition.