Why Commercial Real Estate Leases Are Not Changing (Much) After COVID-19

Of the many industries disrupted by the COVID-19 pandemic, commercial real estate was among the hardest hit. One might reasonably assume that a struggling commercial real estate sector would be good news for franchisees hoping to secure more flexible contracts, but according to a recent article in Franchise Times, the real estate world’s rough year was not the boon for franchising many had hoped for.

According to Joseph Wasch, a Franchise Times writer and senior partner at Wasch Raines, the reason commercial leases haven’t been overhauled is that the sector at large remains bullish on its future.

"We were slow between March and April of 2020, but from May on, it was like, boom, everyone was calling us, can we have a lease reviewed or an FDD we want you to review," said Wasch.

There have been some changes to standard commercial real estate terms, most notably an expansion of force majeure clauses to include “government-mandated shutdowns related to pandemics,” Wasch said. But aside from that decidedly narrow concession, standard contracts are likely to remain largely unchanged compared to those offered before the pandemic.

It’s not all bad news for franchisees, though. Wasch notes that because of the marked increase in vacancies, commercial landlords are showing more willingness to negotiate on pricing and construction timelines. 

According to Wasch, most business owners who successfully stuck it out through the pandemic should have little interest in increased contract flexibility anyway, since they are likely focused on growing, not exiting their businesses.

"The thing about leasing is this: If you have a successful franchisee who is a good operator and he is making money, it doesn’t matter what's in the lease; you just throw that 80-page document into your desk drawer and forget about it until you renew," said Wasch. "If you're doing well, the lease becomes invisible."

That perspective likely comes as cold comfort to franchise owners who are nervous about the next economic downturn, which is why many franchisees are increasingly eschewing brick-and-mortar operations altogether in favor of mobile and home-based franchise opportunities.