Not only that, but as a bonus late Christmas present, the head of the Institute for Fiscal Studies, Paul Johnson has just recommended that the government cease using the Retail Prices Index (RPI) as its chief measure of inflation. Instead he recommends substituting a form of the Consumer Prices Index (known as CPIH - and which includes owner occupiers' housing costs). If this suggestion is adopted, it could result in an increase in tax take and reduction of the deficit, as the higher rate of growth in RPI (as compared against other indices) pushes up the servicing of UK debt (paid for by the UK taxpayer) by billions of pounds.
RPI: A suitable measure of inflation?
There are many ways to measure inflation and an increasing number of indices proliferating in the heady world of statistics which take differing factors and methodology into account, leading to a varied and sometimes bewildering spectrum of results.
The RPI is one of the best known (and at over 60 years longest lasting) of these indices.
It was however "de-designated" as an official National Statistic back in 2013. It has, as mentioned, taken a bit of a pasting in Mr Johnson's report as essentially no longer being fit for purpose. The UK Statistics Authority are to review his recommendations and a public consultation is to be carried out in summer 2015). The writing seems to be on the wall for RPI.
Mr Johnson recommends ending the use of RPI by the government and regulators and instead using CPIH as the main measure of inflation. That could feasibly lead to the complete cessation of RPI in future (although, to be clear, that is not on the cards in the immediate future).
Commercial Leases: RPI-linked rent reviews
Many modern commercial leases feature rent review provisions linked to changes in RPI (or RPIX which excludes the effect of mortgage interest in the calculation of RPI - and is less volatile than RPI as a result). Sometimes such review provisions are subject to a collar (minimum uplift) and cap (maximum uplift).
There is a greater degree of certainty with that approach (within the collar and cap parameters) than in using an "open market" basis. Such greater certainty can be helpful for both landlords and tenants to plan their budgets. CPI might be used occasionally but in my experience RPI (or RPIX) features far more commonly.
What happens if RPI is eventually abolished?
Any well drafted lease containing RPI-linked rent review provisions should include a plan B in the event that the index is rebased or ceases to be published. Commonly the parties will be obliged to put their heads together to come up with an alternative suitable index, failing which there would be a referral to an appropriate third party to settle the matter.
In that scenario parties would need to be careful though. There can be quite considerable differences in the results between using RPI and, say, CPI. CPI tends to run lower than RPI over the long term and as such, and presuming that pattern continues, would result in lower returns at rent review (so good for a tenant, bad for a landlord).
Should parties continue to use RPI going forward?
There's certainly nothing to stop landlords and tenants from continuing to use RPI and no certainty that its publication will wholly cease any time soon. However Mr Johnson's report does recommend that "the RPI should not be used for new contracts".
One benefit of using RPI to calculate rent reviews specifically though is that the SDLT legislation excludes RPI-linked uplifts (though oddly not uplifts pegged to RPIX or any other index) from being subject to additional SDLT payments.
Interestingly, the legislation in respect of the Scottish SDLT replacement tax (Land and Buildings Transaction Tax - LBTT) which is due to take effect on 1 April 2015, provides that no account is to be taken of RPI, CPI or any other similar index in calculating variable or uncertain rent for which further tax may be payable at the outset of the lease.
It appears that this means that the initial LBTT payment will not be on the basis of any assumed increase in RPI and that a LBTT return will not require to be submitted every time rent is increased by RPI - however this does not appear to remove the new (and administratively burdensome) obligation to submit a return every 3 years and pay LBTT on any uplift (whether it is referable to an index or otherwise). The new legislation on this is complex though and further guidance is awaited from Revenue Scotland, expected some time in Feb 2015 - which should hopefully clarify the position.
There are a plethora of other indices which some (though not all) experts deem as being more up to date than RPI and which might result in a better result over the long term (depending of course on which side of the landlord/tenant coin one is on).
For instance the Bank of England advises that the long run "wedge" between RPI and CPI inflation is around 1.3 percentage points a year (CPI being the lower of the two), which is not insignificant in the context of rent reviews taking place over long lease periods.
Given the negative press which RPI is getting from Mr Johnson, now might be a good time for landlords and tenants who commonly use RPI (or RPIX) uplifts to at least give some thought as to whether it is in fact the most appropriate index for them going forward - and perhaps to take specialist advice from an economics adviser on the matter.
The fate of RPI is in the "one to watch" category for the time being - but it might be worth giving some thought to alternative indices going forward.