That model has been eroding, but the acceleration of flexible leasing structures such as turnover-based, hybrid and shorter-term agreements has brought the issue to the fore. As tenant demands have shifted, particularly in retail, the ‘traditional lease’ is no longer the default.

Tenants want affordability and agility, while landlords are increasingly prepared to share both risk and reward. This may be helping deals get done, but it has also introduced new complexities for valuers and lenders.

Turnover-based leases, once a niche instrument, are now mainstream. Savills reports that UK turnover rents typically range from 1% to 15% of sales, averaging around 7%. Deals are often structured as a base rent at about 80% of open market levels, with a turnover ‘top-up’ layered above that.

This aligns landlord and tenant interests. If the store performs well, the landlord benefits; if sales falter, the rent burden eases. Post-pandemic, the model became a lifeline for struggling retailers, but surveys suggest it has lasting appeal.

Yet flexibility comes at a price. For valuers, income is no longer guaranteed; it fluctuates with the wider economy and consumer confidence. For lenders, the implications are starker: underwriting has always depended on predictable cashflows, and turnover leases challenge that foundation.

Instead of discounting a fixed rent, valuers must model outcomes based on past sales, local footfall and sector resilience. Savills notes turnover rent valuations typically rely on the past three years of turnover data – a precarious benchmark in volatile sectors, where consumer behaviour shifts quickly.

This complexity is heightened by divergence across retail sub-sectors. Retail warehousing has proven robust. Savills reports that net effective rents in the sector grew by 7% in 2024, averaging £21 per sq ft, with void rates at just 4.6%.

Investment volumes hit £2.2bn, up 35.9% year-on-year, with projected returns of 9.3% per annum. By contrast, high street retail remains fragile, with slower rental growth and patchier demand. For lenders, this means asset class and location matter more than ever.

The traditional lending model assumes fixed rental income that can be stress-tested against macroeconomic scenarios. With turnover leases, volatility undermines that certainty. Lenders are responding with stricter reporting requirements, adjusted loan-to-value ratios, and, in some cases, bespoke products tailored to flexible leases.

At the same time, 2024 brought a shift in leasing patterns. According to Re-Leased’s UK State of CRE Leasing Report, average retail lease lengths increased by 32% year-on-year in Q1 2024, from 37 to 49 months. Office leases also lengthened, rising 27% from 2.9 to 3.7 years, with leases of three to five years surging 69%. This reversal of the ‘shorter lease’ trend suggests tenants and landlords are seeking stability after years of upheaval.

Regulation 

Overlaying these dynamics is the prospect of regulation. The government has proposed a ban on upward-only rent reviews (UORRs), expected to take effect in late 2026. Their removal would mark a major shift in landlord-tenant dynamics. While many SMEs already operate on leases without UORRs, the ban could accelerate the move towards performance-linked and flexible agreements.

Despite the challenges, flexible leasing also presents opportunities. Linking income to performance enables data-driven risk assessment. If lenders can access real-time sales data through landlord reporting systems or direct tenant disclosure, they can build more accurate models than those based on static assumptions.

PropTech solutions are making this possible. Digital dashboards tracking turnover, footfall and rent collection are increasingly common and could reduce opacity for lenders.

For the most innovative, this is a competitive differentiator: lenders willing to engage with flexible leases may capture high-quality opportunities that cautious rivals overlook.

The rise of flexible leasing signals a profound shift in landlord, tenant, valuer and lender relationships. Income is less predictable but more reflective of real performance. Lease lengths are lengthening again, but with clauses that distribute risk differently. And regulation is nudging the market further towards flexibility.

For lenders, the question is not whether to engage with these changes, but how. A cautious approach of lowering LTVs and demanding more reporting may protect against downside risk. A bolder strategy of embracing data-driven underwriting and bespoke products may capture new opportunities.

Either way, one thing is clear: the traditional 25-year lease with upward-only rent reviews is becoming a relic. The future of commercial mortgage lending will be written in an environment where flexibility is the norm and where lenders’ ability to adapt will be as important as the properties they finance.

Rebecca Sawyer is managing director of GRO Retail