Escalation clause

Escalation clauses are common in commercial leases as a fixed annual percentage or as an increase tied to an index such as CPI. Residential leases rarely escalate mid-term; increases usually come at renewal instead.

A commercial lease starting at $30/SF escalating 3% annually bills $30.90/SF in year two and $31.83/SF in year three.

Escalations protect the income stream against cost inflation over a long term, and they compound. They also fail quietly: an escalation that is never billed is revenue you generally cannot recover once the period has passed.

Abstract the escalation date, method, and any cap or floor at signing, and drive the billing from those fields rather than from someone's memory. For index-based escalations, record which index and which reference month, and keep the published figure you used.

Applying the escalation to the wrong base, missing the effective date entirely, and using an index revision instead of the reference figure the lease names. Whether a missed escalation can be billed retroactively depends on the lease — read it before assuming.