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A clause in any of a wide variety of contractual or real property arrangements that allows one party to increase the price upon the happening of certain specified events. Longterm leases often have rent increases at 3- to 5-year intervals, with the adjustment being a certain stated amount,a percentage of then-current market rents,or an increase based on some index with the first year of the lease representing the benchmark and against which the index is measured.
Example: The parties agree that rent will increase in 5 years in the same proportion as the consumer price index (CPI) in 5 years bears to the current consumer price index. If the rent today is $4,000 per month and the CPI is 179, and in 5 years the CPI is 192, then the new rent is calculated at follows:
192 179 1.0726%
$4,000 1.0726% $4,290.40 per month
Other escalation clauses are used to increase the interest rate in a loan when there has been a default and to increase rent when a tenant remains in possession after expiration of its term.