CPI Increases and COVID-19

23 September 20

CPI INCREASES AND COVID-19


When the June 2020 quarter Consumer Price Index (CPI) All groups data was released by the Australian Bureau of Statistics, for the first time since the March 1998 quarter, the annual change in the CPI for Australia as a whole decreased.

It was the first time since December 1997 that the annual Sydney CPI had decreased and the first time ever, since recording began in September 1949, that the annual CPI for Brisbane had decreased.

This may have an impact on some management rights operators.

How might a CPI reduction affect you?

CPI in Management Rights affects three key areas:
1. The remuneration paid to you by your Body Corporate or Owners Corporation under your Caretaking Agreement;
2. The letting and other fees you charge to your owners for your letting services; and
3. The rent you may pay on properties that you lease from owners.

CPI is everywhere.
It is normal for you to expect an increase in your body corporate remuneration based on annual CPI increases. Really, the whole purpose for the introduction of CPI was to catch the increases in general cost of living.

So what happens when the CPI deceases?

In some cases, it is simply a matter of when the CPI goes up, your remuneration goes up and when the CPI goes down, your remuneration goes down. In other cases, when the CPI goes up, the remuneration goes up, but when the CPI goes down the amount stays the same. It all depends on the wording of your CPI clause. A decrease in the remuneration that may be paid by an Owners Corporation has been unheard of to date. However, if your remuneration is expressed in your Caretaking Agreement to be pegged to an increase or decrease in the CPI, it can now go down.
There are clauses drafted into Caretaking Agreements that allow the Caretakers remuneration to go up, but not down. These clauses are commonly referred to as “ratchet” clauses. In other words, they are like a kangaroo, who can only hop forward and not back!
It is not uncommon for Caretaking Agreements to include a ratchet clause, so that the annual remuneration is never less than the remuneration received the previous year. This often also applies to market reviews, so that even if the market rate is assessed to be lower than the current remuneration, the remuneration does not decrease.
In recent years, we have seen the presence of these ratchet clauses in Caretaking Agreements met with greater resistance from Owners Corporations, who will argue that they are unfair. However, in the next 12 to 24 months, when the CPI starts making a significant comeback, this won’t be an issue.

Where to from Here?

Take a moment to evaluate all the agreements you are a party to and see if you may be affected by a possible CPI reduction. Don’t let a decrease in your remuneration take you by surprise.

Article Written by Col Myers of Small Myers Hughes Lawyers 
Liability limited by a scheme approved under Professional Standards Legislation
Disclaimer – This article is provided for information purposes only and should not be regarded as legal advice. 

Additional Documents

Click here to download: 2020_10_Oct___CPI_Increases_and_Covid_19.pdf

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