How do inflation adjustments impact lease agreements?

Inflation adjustments in lease agreements are designed to protect landlords from the erosion of rental income caused by rising prices. Many commercial and residential lease agreements contain clauses that allow rent to increase in line with inflation, often based on the Consumer Price Index (CPI) or other economic indicators. This ensures that the rent charged remains in line with market conditions, protecting landlords’ profit margins. For tenants, inflation adjustments can lead to higher rental costs, especially in long-term leases. This can impact affordability, particularly in areas where inflation is high. Investors should carefully consider inflation clauses when negotiating leases, as they can influence the stability and long-term viability of rental income.