The indexation clause is not the first thing a small retailer reads in a new lease. It is buried several pages into the review schedule, it is written in the kind of English that was never meant to be spoken aloud, and it is the single line on the document that will do the most to determine whether the business still exists in five years.
Most of the small retailers and hospitality operators I have spoken to in the past twelve months signed their current leases in 2021 or 2022. The assumption embedded in their indexation clauses, usually CPI with a 3 to 4% floor or a straight CPI+2.5% formula, was that Australian inflation would continue to run at the 2 to 3% the Reserve Bank targeted and broadly delivered through the 2010s.
That is not what followed. Headline CPI ran at 6.59% in 2022 and 5.60% in 2023. By the February 2026 monthly indicator, annual inflation had returned to 3.7%, but it has not been below the RBA target band for nearly four years. The compounded effect on a CPI-indexed lease is substantial, and it has now been working through the rent roll for long enough that the aggregate numbers are visible in the landlord disclosures.
The mechanism, stated plainly
CPI indexation in Australian commercial leases is almost always applied to the preceding year’s rent, not to the initial base rent. This detail, the one that matters most, is rarely explained at signing. It means each year’s increase compounds on the last.
A lease signed at $60,000 per annum in January 2021, indexed to headline CPI, would have rolled forward to:
- January 2022: $60,000 × 1.035 = $62,100
- January 2023: $62,100 × 1.0659 = $66,193
- January 2024: $66,193 × 1.056 = $69,899
- January 2025: $69,899 × 1.0412 = $72,779
- January 2026: $72,779 × 1.036 = $75,399
Five years of indexation. Base rent up 25.7%. If the clause had included a 4% floor for the down-weighted year, the 2026 figure sits closer to $76,000.
For context, the Colliers Q2 2025 Australian Retail Snapshot recorded national average gross face rents up 0.3% quarter on quarter, 1.5% year on year. The clearing rate for new commercial space, in other words, moved substantially less than the contractual escalations in existing leases. Tenants on CPI+ clauses have been paying above the actual market clearing rate for at least eighteen months, and on renewal many of them are discovering it.
Why it was never discussed at signing
Two reasons. The first is that in the ten years before 2022, headline CPI averaged roughly 2%, and the compounding effect was small enough to be invisible year-on-year. Owners who signed leases in 2014, 2017, or 2019 could reasonably expect indexation to produce rent uplifts that were neither remarkable nor destabilising.
The second is structural. Australian commercial landlords, particularly the institutional investors who own shopping centres, prefer CPI or CPI+ clauses because they provide a predictable income stream that can be debt-financed at favourable ratios. Tenants agree to them because the alternative (frequent market reviews) is usually worse when the space is desirable.
The Shopping Centre Council of Australia, the peak industry body for institutional landlords, holds the position that existing retail tenancy protection regimes are “unique to Australia and extensive” and do not require substantive reform.
What NSW is doing
In October 2025, the NSW Minister for Small Business introduced the Retail Leases Amendment (Review) Bill 2025, the first tranche of reforms recommended by the NSW Small Business Commission’s 2024 review of the Retail Leases Act.
The Bill does not reform CPI indexation directly. Its principal provisions:
- Tighter disclosure on option exercises, including improved transparency around pharmacy-turnover rent provisions.
- Broader “commercial factors” (foot traffic, retail mix, road frontage, landlord leasing strategy) that must be considered when relocation-rent adjustments are calculated.
- An extension of the cooling-off period following option exercise.
The choice not to address indexation directly was, the Commission has acknowledged, a political one rather than an analytical one. The landlord submissions in the consultation were uniform in opposing any change to the indexation regime; tenant submissions were uniform in requesting one. The Commission proceeded with the reforms where it could find compromise.
What the other states are doing
Very little, visibly. Victoria’s Small Business Commission continues to use the existing mediation framework, which handles disputes but does not intervene in the indexation clause itself. Queensland’s regime does not materially differ. The Western Australian SBDC publishes consumer-facing guidance on how CPI indexation works but stops short of recommending structural change.
The practical implication is that tenants in states other than NSW will continue to operate under the 2022-era indexation framework, with the full compounding pressure, for the foreseeable future. Any relief for those tenants will come from individual negotiation at lease renewal, not from legislative intervention.
For operators on current leases
The tactical advice from the commercial real-estate brokers I spoke to, for operators with three or more years left on a CPI-indexed lease, is narrower than the policy conversation suggests.
- Ask for an indexation cap in writing at the first renewal or lease variation. A 3% cap is an ambitious request but not an unreasonable one in a market where the clearing rate is running below contractual escalations.
- Model the next five years of rent as CPI plus any contractual floor, compounded, and compare against your contribution margin trajectory. If the rent line grows faster than the contribution margin line, the business has a lease problem, not a revenue problem.
- If the landlord is an institutional investor, ask to be put in touch with the asset manager rather than the leasing manager. Asset managers are incentivised on occupancy and credit quality; leasing managers on nominal rent. The conversation is substantially different.
Those are, I should be clear, operator moves, not policy remedies. The policy remedy, if one is coming, will begin in NSW and spread slowly.
In the meantime the ratchet keeps ratcheting, and most tenants are reading the clause for the first time on renewal, which is, by definition, too late.