California Real Estate Practice Exam

What happens if a lease contains an escalator clause and the cost of living index rises?

1. The rent decreases

2. The rent increases

3. The rent remains the same

4. The rent is fixed for the lease term

The correct answer is: The rent decreases

An escalator clause is a provision within a lease that allows for adjustments to the rent based on specific economic indicators, often linked to the cost of living index. When the cost of living index rises, the escalator clause typically stipulates that the rent will increase accordingly, reflecting higher living costs and inflation. In this context, if the lease indeed contains an escalator clause tied to the cost of living, the natural consequence of an increase in that index would lead to an increase in rent. Such clauses are designed to ensure that landlords receive fair compensation that keeps pace with economic changes. This means that the correct outcome in the case of a rising cost of living index is that the rent increases, aligning with the purpose of the escalator clause. Therefore, the notion that the rent would decrease or remain the same does not align with the mechanics of how escalator clauses function; they are intended to adjust the rent upwards in response to increased living costs, ensuring landlords are not adversely affected by inflation.