In many markets around the world, it’s common practice to see property rents adjusted annually in line with a predetermined price index. In the UK, indexation was at one time considered best practice to help all parties forecast and budget. So, while at present open market reviews are still most common, we do often see indexation adopted in autorenewal clauses on serviced and flex space contracts and on service charge caps. It’s therefore likely that somewhere across a property portfolio this type of increase will be encountered, and it is now more important than ever to proactively manage these increments.

So what can be done to mitigate the impact of indices running at extortionate rates?

The first thing an occupier can do is check that the adopted indexation and rent calculation are correct. Often there is a benchmark month or year (usually aligned to the lease start date) that the indexation multiplier is pegged to. The increase in the relevant index (in the UK sometimes the Retail Price Index, more commonly now the Consumer Price Index) between that date and the review date then determines the rental multiplier.

The next thing to check is whether there is a ‘cap and collar’. This is an upper and lower threshold within which the annual change must sit. So where for example a cap of 7 per cent is set out within the lease and the annual index increase is 10 per cent, the increase multiplier would be 1.07.   

For those occupying flexible office space – whether they be start-ups or large corporates – the situation may be a little different. Flex contracts often contain autorenewal clauses, again with annual increases, but these aren’t necessarily index-linked. It’s worth checking the small print, and again ensuring the calculations are correct.

Even where the increases are not linked to a variable rate, don’t become complacent. A fixed annual increase should still be monitored closely as year-on-year rents will be compounded, so over time an affordable rent could become prohibitive, even if it rises at a slower rate than one that’s indexed-linked.

Lease formulae can be complex, and errors do creep in. Whether in flexible or conventional leased space, it’s worth auditing payments in detail to ensure everything is correct. In some countries we are seeing potential government intervention, so it is important to ensure these are being accurately reflected where applicable.

Where the rent increases are unaffordable, it’s worthwhile opening a dialogue with your landlord. Discussions could include payment plans, removing the indexation completely, introducing a cap and collar or resetting the base rent. In all cases we recommend taking advice to help with these discussions and to ensure the outcome aligns to the wider real estate strategy.

Further information

Contact Emma Morton

Savills Occupier Services