Types of Rent Escalation Clauses
There are a couple of types of rent escalators:
Stepped Rent Escalation Clauses
This type of rent escalation allows your landlord to increase your
rent at specific intervals. For example, you might pay $30 a square foot
in year one, $31 in year two, $32 during year three, and so on.
While many landlords like small annual increases, longer-term leases
(especially those of 20 years or more) may have more substantial hikes
spread out, like a 10 percent increase every five years.
This type of rent increase favors tenants because it eliminates uncertainty over what you'll be paying over time.
Escalation Clauses That Depend on A Specific Trigger
With this type of clause, your rent only increases if the landlord
experiences an increase in costs as specified in the contract. These
increases are always tied to triggers.
If the trigger for your escalation clause is property taxes, you'll
pay more if your landlord's property taxes go up. Because property tax
increases usually aren't wildly unpredictable, this type of escalation
shouldn't affect your practice too much.
One of the more popular pass-through escalation clauses is tied to
direct operating cost. Since operating expenses fluctuate, the landlord
has a way to offset such costs by passing some of them onto the tenant.
Operating expenses can include utilities such as heating, air conditioning, security, and maintenance.
With this type of escalator, your rent rises in lockstep
with the Consumer Price Index (CPI).
It's difficult to predict the movement of the CPI. And,
changes can be sudden and dramatic. That's why this type of escalation is
usually the worst for tenants.
If your rent is tied to the CPI and inflation spikes, what
you pay for rent will skyrocket. However, if you're able to cap the amount it
can go up, you'll eliminate much of the sting from this kind of escalator.
In times of high inflation, your rent goes up—but not too
much. And when the cost of living is low, you end up with little to no rent
escalation to worry about.
Some landlords entice a tenant to sign a new lease by
capping the amount of rent escalation. Or, agree not to require one until the
second year of a tenancy.
Unfair Use of Rent Escalators
Rent escalators are a good thing because if they're used in the way
they were intended, your landlord is ensured of a fair profit.
However, some landlords abuse these clauses as a way to fatten up
their coffers on your dime. Because there are so many ways to figure out
operating costs, there's enormous potential for a landlord manipulating
the numbers to gouge you.
For example, actual operating expenses increase by about 2.5% to 3%
per year. Unscrupulous landlords will calculate your rent escalator
based on the entire base rent and not just the portion of that which is
The base rent may be $50 per square foot. The portion of that $50
allocated to operating expenses will be about $13 to $18. But the
landlord gets an increase based on the entire $50 per square foot, which
means you'll be paying more than your fair share.
Be aware of this practice, so when it comes time to negotiate, your tenant rep can speak up for you.
Sometimes rent escalation clauses are tied to the Consumer Price
Index. However, this doesn't necessarily correlate to increases in what
it costs to operate the building. It could be less, or it could be more.
Rent escalators triggered by increases in the building's operating
expenses are more accurate. However, it can be difficult to agree on
what constitutes these costs. It's easier to calculate an annual fixed
rate than those based on operating costs or an index.
Have your broker negotiate for better terms if the rent
escalation clause in a lease you're considering signing seems unfair.
Offering a longer lease time or compromising on things that don't really
matter could help you come to an agreement that's more beneficial for