Indexation clauses in leases, contracts and general terms and conditions

Indexation clauses: what and how

What are indexation clauses? Indexation clauses provide that the price in a contract is automatically adjusted based on an objective criterion, often the CPI inflation rate. The indexation clause is type of price adjustment clause. It increases the price without the buyer/customer having to agree. Such a clause can often be found in long-term contracts. The indexation clause regulates, for instance, that the price is increased every twelve months.

Indexation clauses can be hard to fathom, because there are several variables. First, the objective criterion (e.g. the CPI), but also the manner in which the index figure is calculated. The following is a calculation example based on the indexation clause in the 2015 general terms and conditions of the ROZ Real Estate Council of the Netherlands:

A change in the rent agreed in clause 4.5 of the lease takes place on the basis of the change in the monthly price index figure according to the consumer price index (CPI) series all households (2006=100), published by Statistics Netherlands (CBS). The changed rent is based on the following formula: the changed rent is equal to the current rent on the date of the change, multiplied by the index figure of the calendar month four calendar months before that in which the rent is changed, divided by the index figure of the calendar month sixteen calendar months before that in which the rent is changed.

A case in point would be a lease for office space governed by the 2015 general lease conditions. The lease was entered into as from 1 November 2021 and the rent of EUR 1,000 is therefore indexed as from 1 November 2022. The increase is as follows:

CPI all households 1 July 2022 (four months before 1 November 2022): 141.75

CPI all households 1 July 2021 (sixteen months before 1 November 2022): 128.53

(1000*141.75)= 138,810 / 128.53 = EUR 1,103 (This is a price increase of 10.3%!)

A handy tool to calculate the price indexation of leases (or other contracts with similar indexation clauses) can be found on CBS’s website: https://www.cbs.nl/nl-nl/onze-diensten/bereken-huurverhoging-vrije-sector-huurwoning-of-bedrijfspand.

High inflation: beware of indexation clauses

Little attention was paid to indexation clauses until 2022, because the inflation rate in the Netherlands had been well below 5% since 1990: i.e. an annual price increase of less than 5%. In the case of a procurement contract, the higher purchase price could be included in the periodic increase of the sales price.

Many long-term contracts and general terms and conditions contain an indexation clause, often based on the CPI. In light of the high inflation rates in the past year, it is important (i) to be prepared for sharp price increases in current contracts; and (ii) to negotiate indexation clauses. Another simple adjustment to the indexation clause is to build in a ceiling. That ceiling could be 5% per year, for instance.

Tips for indexation clauses

The tips that we would like to share with suppliers and buyers regarding indexation clauses are the following:

Tips for suppliers
  • Make sure the price increase is calculated in a timely and careful manner, and implement the price change immediately (this avoids discussions about forfeiture of rights).
  • When entering into a contract as a supplier in a chain, make sure that the price indexations used by your own suppliers do not exceed the price indexations in your contracts with customers.
  • If the indexation clause provides that the price will be increased as of a fixed date, it is advisable to exclude that clause in the case of contracts that are less than four months old on that date (to avoid a price increase shortly after the contract is entered into).
  • The inflation rate may also be negative (deflation), which would reduce the price. It is wise to provide in an indexation clause that the clause applies only in the event of a positive inflation rate.
Tips for buyers
  • Be prepared for a higher price increase for current contracts with indexation clauses that will expire soon.
  • In the case of current contracts: make sure that the indexation clause is clearly worded. An unclear or incomplete clause may be interpreted to the supplier’s disadvantage.
  • In the event of imminent price increases due to indexation clauses in current contracts: consider negotiating with the supplier(s) in advance in order to limit the price increase.
  • In the case of new contracts: add a maximum price increase per year to indexation clauses.

Please contact our contract law specialists if you have any questions about indexation clauses.

This article was published in the Newsletter Vestius of April 2023