Residential Real Estate

Rental adjustment provisions are a common component of most leases. Often such adjustments are linked to the rise and fall of the Consumer Price Index (CPI). Sometimes referred to as a cost of living adjustment (COLA), these adjustments typically occur annually on the anniversary of the start date of the lease.  The adjustments parallel the increase, or decrease, in the CPI over that same period. For example if the CPI increases 3% then the rent will increase 3% as well.

One inherent problem with using the CPI as an index for adjusting rent is that landlords are forced to wait a few months before billing tenants for the newly adjusted rent.  This problem is a result of the fact that there is a delay in the publication of the CPI. In other words, the CPI for January may not be published until March because the Government must gather and analyze data prior to releasing the index to the public. This forces landlords to bill tenants retroactively for the adjustment in rent each year. If January is used as the month that the rent adjusts each year, then landlords must wait until the CPI for January is published at some later date in order to know exactly how much to increase, or decrease, the rent. Besides being inconvenient, retroactively billing a tenant causes budgeting problems and accounts payable issues for tenants not to mention cash flow planning problems for landlords.  

One solution is to set the CPI index date as a date prior to the rental adjustment date. In other words, separate the two dates. If a lease begins in January and the landlord would like to bill and collect the adjusted rent annually in January, he should set the CPI index date as the month of November (i.e. two months prior). In doing so, the landlord can be assured of having the published CPI index by the time he is ready to bill the rent for January. The difference between the November CPI and January CPI will be almost certainly be negligible, so there is little downside for either the tenant or landlord.

Conceptually, and in an abbreviated form, the lease language might read: "The monthly rent shall be adjusted annually in the month of January. The adjustment will be based upon the difference in the CPI between the months of November 2011 and November 2012…"