4.9 Agreements with an index clause

The purpose of an index clause is to tie the value of an economic commitment to an index so that the commitment retains its value at the same level throughout the duration of the agreement. Finland adopted legislation in 1968 which prohibits the use of index clauses, but the relevant act nonetheless lists a number of exceptions where index clauses are accepted. Common examples where ordinary consumers are likely to find index clauses are rental agreements, insurance agreements, collective labour agreements and pension agreements. In business and industry, long-term delivery contracts, business and leasehold agreements and several building contracts are tied to various indices.

For the sake of an example, take a rental agreement for a 30-square-metre studio in the centre of Helsinki. The studio was rented out on 1 January 2001. The agreement says that the rent shall be revised once a year in January in accordance with the value of the cost-of-living index 1951:10=100 for November in the previous year. In addition to the rent, the tenant is required to pay a separate water charge collected by the housing corporation. The base rent at January 2001 is 500 euros and the base period index value for November 2000 is 1519.

Let us calculate the rent for 1 Jan 2002 and 1 Jan 2003, given the November 2001 base period index value of 1543 and the November 2002 index of 1568.

To calculate the new rent, the latest index value is always placed above the bar as the numerator and the base period index value as the denominator below the bar. The quotient is always multiplied by the base rent. Rental agreements may use any index or any method of revision. The landlord and tenant may agree, for example, that the rent is tied to the cost-of-living index, but shall be increased annually by a minimum of 3 per cent, etc.