Rent Escalation

Rent escalation is a clause in a lease contract that allows the landlord to increase rent at predetermined intervals. The main purpose of rent escalation is to allow the landlord to adjust rent according to inflation, increased property taxes, or higher operating expenses. There are several types of rent escalation, including:

Fixed Increase: This type of escalation means that rent will increase by a fixed amount at specified intervals. For example, a lease might state that rent will increase by $50 per month every year.

Indexed Increase: This type of escalation is tied to an economic index, like the Consumer Price Index (CPI), which measures inflation. If the CPI increases by 2%, for example, the rent would also increase by the same percentage.

Operating Expense Increase: In this type of escalation, the tenant agrees to share in the increased operating costs of the building. If the landlord's expenses for things like utilities, maintenance, or property taxes increase, the tenant may be required to pay a portion of those increased costs.

Step-Up Lease: This is a type of lease where the tenant and landlord agree upfront on a set of rent increases over the course of the lease.

Market Review: The rent is reviewed at specific intervals and compared to current market rates. If market rates are higher, then the rent is adjusted accordingly.

Rent escalation clauses provide landlords a hedge against inflation and increased costs of ownership, but they also create predictability for both parties by specifying future increases in rent. Tenants, however, need to carefully consider rent escalation clauses when signing a lease, as they will impact the future cost of leasing the property.