Why Strip Mall Landlords Should Avoid Using the Consumer Price Index

Using the CPI Can Cause Major Problems in Collecting Those Rent Increases!

By Legal Contributor David Durrett, Esquire–Cohen Durrett, LLP

Many commercial lease structures include rent adjustment provisions that rely on changes in the Consumer Price Index (“CPI”) which is assumed to reflect the cost of living increases, if any. Unfortunately, landlords do not appreciate that the U.S. Department of Labor, Bureau of Labor Statistics publishes many indices and does not publish every index every month. Also, the base year for comparison, the year on which the rental increases is to be based, has been changed for some indices. The calculation of the rent increase can be done for the single year just completed or for the period of time back to the original date of the lease.

Ironically, the negotiation of a CPI clause often results in a tenant’s desire for a ceiling (e.g., not to exceed five percent per year) and a landlord’s desire for a floor (e.g., not to be less than two percent per year). In essence, each party desires some certainty concerning the rent adjustment.

Because of the risk of using a CPI provision, landlords may be better served by simply increasing the rent by a fixed percentage each year.

Aside from often not clearly indicating the appropriate index, landlords often forget to enforce the CPI clause and to make the required calculations. If a landlord should fail to make the calculation and advise the tenant of a rent increase, then the landlord may be surprised to learn about Section 2076 of California’s Code of Civil Procedure.

Section 2076 requires a person receiving money, at the time the money is received, to object if the money tendered is insufficient. If no objection is made, then the person receiving the money is considered to have waived any right to additional payment. Based upon this statute, the California Supreme Court held in the case of Julian v. Gold, 214 Cal. 74 (1931), that

a landlord cannot demand payment of rent for past months if he has already accepted partial payment for those months without objection

. A similar result occurred in Bettleheim v. Hagstrom Food Stores, 249 P.2d 301 (1952), where a landlord was entitled to an increase in percentage rent from two percent (2%) to four percent (4%), but who continued to accept two percent (2%) by mistake. The appellate court held that the landlord lost its right to demand the additional two percent (2%).

Too often landlords contact attorneys after they have forgotten to send the tenant a notice of an increase based on the CPI adjustment. Section 2076 poses a problem as to the rent already collected. Landlords would probably be better served by using a rent schedule that shows fixed percentage bumps that require no future calculations by either party over the course of time. Of course, this still does not relieve the landlord of comparing the check with the rent schedule. The underlying theory for such a schedule is to keep it simple. If landlords feel that complexity makes the provision better, then attorneys will profit in resolving the complexity.

Attorney David Durrett has practiced as a shopping center lease specialist for over 25 years in Northern California. David has represented Fortune 500 clients and sole practitioners. He can be reached durrettatcohendurrett.com, or at (916) 927-8797. Neither Cohen Durrett nor Mr. Durrett are offering legal advice with this article, and any legal questions pertaining to this content should be directed toward your legal counsel.

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