Escalation Clauses Explained So You Don’t Get Surprised!

Escalation Clauses—What to Expect

Hi, my name is Casey Prindle, and today I want to talk to you about something that can really sneak up on commercial tenants—escalation clauses.

You might lock in a lease at what feels like a good rate, but two or three years in, you notice your monthly rent isn’t what you expected. That’s the escalation clause at work.

So what exactly is an escalation clause? It’s a provision in your lease that increases the rent over time. There are a few common ways this is structured, and it’s important to know the difference because it can have a big impact on your bottom line.

1. Fixed Increases: This is the most straightforward, and most common type. The lease spells out how much your rent will go up each year—usually 2% to 4% annually. This provides predictability, which is great for budgeting, but you still need to account for it long-term. If you’re signing a 5 or 10-year lease, make sure to calculate what your rent will look like in year 7—not just year 1.  The rent schedule is typically spelled out in a Lease so this is easy to visualize.

2. CPI Increases: This ties your rent increases to the Consumer Price Index. This is rare.  I’ve only seen one Lease in 15 years of working in commercial real estate that was tied to CPI. That means if inflation goes up, your rent does too. It’s a way for landlords to hedge against rising costs. But unlike fixed increases, CPI-based hikes can be a little harder to predict—and in a high inflation environment, that could mean double-digit increases.

3. Step-Ups or Tiered Increases: Instead of increasing every year, some leases have built-in “step-ups” every few years. For example, your rent might stay flat for the first two years and then jump by 8% in year three. These are more common in longer-term leases and can catch tenants off guard if they haven’t budgeted ahead.

So why do escalation clauses exist? Well, landlords have rising costs too—property taxes, maintenance, and insurance all tend to go up. These clauses help ensure the rent keeps pace with expenses. But that doesn’t mean you can’t negotiate the terms.

Here are a few tips:

·         In leases with fixed increases, see if the landlord will agree to smaller bumps in exchange for a longer term. For example, 2.5% annually instead of 4%.

·         Ask whether the escalation applies to base rent only or to net charges too. That detail matters.

·         Review how the escalation clause is worded. Vague or open-ended language can lead to disputes down the line.

And one more important point—if you’re in a multi-tenant property and paying CAM charges, make sure the landlord isn’t double-dipping by including increases in both CAM and rent escalations.

Before you sign anything, run a projection. You want to know exactly how much you’ll be paying in year one, three, five, and beyond. It can be an eye-opener.

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