Legal Definitions - index lease

An index lease is a type of rental agreement where the amount of rent paid is not fixed for the entire term but is periodically adjusted based on a specific, predetermined economic indicator or index. This mechanism ensures that the rent keeps pace with inflation or changes in the cost of living, providing a fair and objective method for rent adjustments for both the landlord and the tenant.

Here are some examples illustrating how an index lease works:

• Commercial Office Space: A tech startup signs a five-year lease for office space in a bustling city center. The lease agreement specifies that the base rent will be adjusted annually according to the local Consumer Price Index (CPI), with a maximum increase of 3% per year. If the CPI for that city increases by 2.5% in a given year, the startup's rent for the following year will also increase by 2.5%. This ensures the landlord's rental income maintains its purchasing power over the lease term, while the tenant benefits from a transparent and predictable adjustment method tied to broader economic conditions.

• Retail Store in a Shopping Mall: A popular clothing boutique leases a space in a new shopping mall for a ten-year term. Their lease includes a clause stating that the rent will be reviewed and adjusted every two years, linked to the national Producer Price Index (PPI) for retail trade, with a floor of 1% and a cap of 4% for each adjustment period. This means that if the PPI indicates a significant rise in the cost of goods and services for retailers, the boutique's rent will increase accordingly, reflecting the changing economic landscape for businesses in that sector.

• Industrial Warehouse Facility: A logistics company enters into a long-term, fifteen-year lease for a large warehouse and distribution center. The lease agreement stipulates that the rent will be re-evaluated and adjusted every three years based on a specific regional industrial real estate index published by a reputable real estate analytics firm. This ensures that the rent for the warehouse remains competitive and reflective of the current market value for similar industrial properties in that geographical area, protecting the investment of the property owner while providing the tenant with rent adjustments tied to objective market data.