Commercial Lease Agreements

Most businesses either own or lease space in which to conduct their business. One especially significant term in a commercial lease agreement is the rental amount. Depending on the length of the lease, either the landlord or the tenant may want to have adjustments to the rental amount over time. One common term included in commercial lease agreements is an adjustment based on "CPI" or the Consumer Price Index.

This is a complicated term and one in which most landlords and tenants are unfamiliar. The Department of Labor releases a number of different "indexes." Several of the most frequently used are:

Consumer Price Index for All Urban Consumers for the United States, Consumer Price Index for Urban Wage Earners and Clerical Workers for the United States, Consumer Price Index (All Urban Consumers) for a designated region, and Consumer Price Index (Urban Wage Earners and Clerical Workers) for a designated region.

The later two regional indexes are generated by the Department of Labor for three different metropolitan areas in California: the San Diego Metropolitan Statistical Area, the San Francisco-Oakland-San Jose Consolidated Metropolitan Statistical Area, and the Los Angeles-Anaheim-Riverside Consolidated Metropolitan Area.

Normally, the Index used in the Lease will specifically reference which of these it is referring to.

AVERAGE INCREASE OF EACH INDEX

The average increase in each of these indexes is as follows:

1. Consumer Price Index (All Urban Consumers)

2000 2%
2001 3%
2002 3%
2003 1.6%
2004 2.2%
2005 2.7%
2006 3.1%
2007 3.6%
2008 3.8%

2. Consumer Price Index –Urban Wage Earners and Clerical Workers

2001 2.9%
2002 1.1%
2003 2.2%
2004 2.0%
2005 3.65%
2006 3.68%
2007 2.5%
2008 4.2%

3. Consumer Price Index – All Urban Consumers – Los Angeles

2001 3.5%
2002 3.1%
2003 2.9%
2004 2.2%
2005 4.7%
2006 4.6%
2007 3.5%
2008 3.1%

The normal term in a CPI adjusted lease would say something to the following:

(b) Commencing with the thirteenth (13th) full calendar month after Tenant is obligated to pay rent under this Lease, and at the end of each twelfth (12th) month afterwards during the Term, including any extensions or renewals, the Minimum Monthly Rent for the ensuing twelve (12) month period ("Adjustment Period") shall be an amount equal to the greater of:

(i) the Minimum Monthly Rent in effect immediately prior to the commencement of this Adjustment Period (without regard to any temporary abatement of Rental then or previously in effect pursuant to the provisions of this Lease), or

(ii) the product obtained by multiplying the Minimum Monthly Rent in effect immediately prior to the commencement of the Adjustment Period (without regard to any temporary abatement of Rental then or previously in effect pursuant to the provisions of this Lease) by a fraction, the numerator of which is the Index published nearest but prior to the commencement date of the Adjustment Period and the denominator of which is the Index published nearest but prior to the commencement of the twelve (12) month period immediately preceding the Adjustment Period.

The INDEX is defined as one of the above-referenced indexes.

A TLD attorney can make sense out of the rental adjustment term in your lease agreement, as well as any other terms that may be confusing or uncertain.

Please call us if you would like a lease review or an attorney to help you negotiate a lease agreement.

Article Submitted By: Attorney Brooke Pollard

Comments

[Robin]

I thought this was very interesting. Two questions:

(a) Is there a Dept of Labor website that lists the regional indexes?

(b) Are there other objective indexes that are sometimes used in commercial lease agreements besides the CPI?

[Robin]

I thought this was very interesting. Two questions:

(a) Is there a Dept of Labor website that lists the regional indexes?

(b) Are there other objective indexes that are sometimes used in commercial lease agreements besides the CPI?

[Robin]

I thought this was very interesting. Two questions:

(a) Is there a Dept of Labor website that lists the regional indexes?

(b) Are there other objective indexes that are sometimes used in commercial lease agreements besides the CPI?