The Consumer Price Index (“CPI”), is the measure in changes over time of the retail price for a basket of consumer goods and services. CPI is used, amongst other indicators, as a measure of the cost of living and economic prosperity. One of the CPI’s most common use is in fluctuating the rental price for both retail, commercial and residential leases.
Yesterday, the Australian Bureau of Statistic released the June 2020 CPI which indicated a national decrease of 1.9% when compared to the previous quarter, and in Sydney we have seen a deceased of 2.3% when compared to the previous quarter. This is only the third time since 1949 that the Australian CPI has reflected a decrease.
The Australian Bureau of Statistics names and shames the biggest contributors to the Sydney decrease as being the lower prices of fuel, a fall in pre-school and primary education as well as the Government’s free childcare initiative.
It is important to note that although the quarter decrease appears to be quite significant, the annual decrease when comparing June 2019 to June 2020, sees a national decrease of 0.3% and a Sydney decrease of 1%.
What does this mean for you?
Given that the CPI decrease has been deemed ‘the largest decrease in 72 years’, it is important to identify how the decrease can practically impact you.
One such area of concern is in commercial, retail and industrial leases. Most of these leases will include a provision for the rent to be reviewed (and normally increased) on an annual basis. Whilst in some cases the rent may increase by a fixed amount or fixed percentage, other leases will rely on the rent to increase in accordance with the increasing CPI.
The new rent will normally be calculated in accordance with a formula such as:
NR = OR x (C/R)
where:
NR = the new rent to be paid from the date of the rent review;
OR = the old rent (or current rental amount);
C = the current CPI, meaning the CPI for the quarter immediately prior to the current review date; and
R = the previous CPI, meaning the CPI for the quarter immediately prior to the last review date.
The decreased CPI in June 2020 as compared to June 2019 will now mean that the rent will now decrease for those tenants whose lease uses the CPI method of rent review.
We have provided the following example to illustrate how this will happen:
Assuming the current rent for a leased premises in Sydney is $40,000.00 and falls due for renewal between June 2020 to September 2020 when the next CPI is released, then given that the CPI for June 2019 was 115.9 and the CPI for June 2020 is 114.7:
Formula = $40,000 x (114.7/115.9)
New Rent = $39,585.85
However, that is not to say that all leases with a review date between June 2020 and September 2020 will experience a decrease in rent. This will only be the case for any lease which has the following features:
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The rent review date falls between June 2020 – September 2020.
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The rent review method uses CPI to calculate the new rent.
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The lease does not contain any clause to prevent the rent decreasing (also known as a “rent ratchet” clause). These rent ratchet clauses are prohibited in a retail lease but will often appear in commercial leases.
Practical Steps
Unfortunately, it is impossible to cater for every economic event when drafting a lease, and the events we have experienced so far in 2020 have demonstrated that.
If you are a landlord or a tenant, it is important that you undertake a review of your lease to determine whether the latest CPI will affect your obligations. We suggest that you review your current lease for the following:
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To determine whether the CPI will affect the rent you receive;
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To determine whether the Sydney or Australian CPI will affect your lease; and
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To consider whether there is any rent ratchet clauses prohibiting any decrease in the rent.
For more information on the CPI, see below link to Australian Bureau of Statics Media Release: https://www.abs.gov.au/ausstats/abs@.nsf/Latestproducts/6401.0Media%20Release1June%202020?opendocument&tabname=Summary&prodno=6401.0&issue=June%202020&num=&view=
ABOUT KAISHA GAMBELL:
Kaisha is a senior lawyer at Coutts Lawyers & Conveyancers and heads our Wills and Estate planning team. She has been a successful and established lawyer in the Macarthur Region in excess of 5 years, where she has drafted and acted for many individuals and families with a net worth between $350,000 to 10,000,000.
For further information please don’t hesitate to contact:
Kaisha Gambell
Senior Lawyer
kaisha@couttslegal.com.au
02 4647 7447
This blog is merely general and non specific information on the subject matter and is not and should not be considered or relied on as legal advice. Coutts is not responsible for any cost, expense, loss or liability whatsoever in relation to this blog, including all or any reliance on this blog or use or application of this blog by you.
