Rent indexation under commercial property leases is a topical issue and particularly relevant during the first quarter of a month. If its conditions are spelt out in detail, it will help avoid potential landlord-tenant disputes. But how to choose the right index and what to focus on during lease negotiations?
HICP, MUICP, EICP – what are they all about?
HICPs include month-to-month indices (Percentage change M/M-1), indices relative to the corresponding month of the previous year (Percentage change M/M-12 - annual rate of change), and average annual indices (Percentage change - 12 months average). The right choice of an index is a complicated process and should be made on the basis of a detailed analysis of a market situation and in accordance with the best practices in the real estate industry,
comments Aneta Rynkiewicz, Client Finance Manager, Asset Service EMEA, Cushman & Wakefield.
Which HICP is most commonly used?
Our analysis of lease agreements under our management has revealed that 75% of contracts provide for indexation by the HICP - all items computed relative to M/M-12. By geographical area, the MUICP is most commonly used, followed by the EICP. The choice is driven by the macroeconomic situation and analysis of inflation as at the lease date – parties to an agreement, supported by a team of advisers, choose the most favourable index from the point of view of their best interests,
adds Aneta Rynkiewicz.
During the lease negotiation process we also pay attention to theoretically less important issues which may contribute to generating substantial savings and secure the interests of both parties throughout the lease term. More is needed than just specifying the index properly. It is always worth stating clearly whether the annual rate of change or the 12-month average rate of change will be used for indexation in the years ahead. For complete clarity, we suggest including a link to the website on which such an index can be tracked. This will help prevent many misunderstandings,
explains Damian Kołata, Partner, Head of Industrial & Logistics Agency Poland, Head of E-Commerce CEE, Cushman & Wakefield.
Given the current rate of inflation in Poland and the European Union, rent indexation is one of the most crucial issues during discussions between landlords and tenants. Leases very often include provisions on the minimum and maximum indexation values and exclusion of negative indexation. This is to properly secure the interests of both parties, which is particularly important in the still volatile macroeconomic environment,
concludes Aneta Rynkiewicz.
About Cushman & Wakefield
Cushman & Wakefield (NYSE: CWK) is a leading global commercial real estate services firm for property owners and occupiers with approximately 52,000 employees in approximately 400 offices and 60 countries. In 2022, the firm reported revenue of $10.1 billion across its core services of property, facilities and project management, leasing, capital markets, and valuation and other services. It also receives numerous industry and business accolades for its award-winning culture and commitment to Diversity, Equity and Inclusion (DEI), Environmental, Social and Governance (ESG) and more. For additional information, visit: www.cushmanwakefield.com.