COVID-19’s Impact on Commercial Real Estate May Present an Opportunity for Franchise Systems

By Kristen M. Smith

COVID-19 has impacted many facets of franchising, including real estate. Both the real estate market itself and the ways in which real estate is being used are beginning to shift.

The commercial real estate market has no doubt felt the impact of COVID-19. After initial business closures earlier this year, some businesses have not reopened at all and many have only done so in a limited capacity. As a result, commercial space vacancies are at an all-time high. The number of vacancies has created bargaining leverage for renters, with landlords offering lower rent prices and being more willing to offer concessions than in years prior. This shift in the market creates a unique opportunity for franchise systems that are eager to expand, since they can potentially do so for a lower cost and with more favorable lease terms.

Franchise systems are also evaluating how they are using their real estate. This is best exemplified by the food industry. While greater seat capacity for eat-in dining may have been a revenue driver in the past, in 2020, there has been a not-so-subtle shift to delivery, take-out and outdoor dining.

To account for market shifts like this, franchise systems should evaluate how to best leverage their real estate. This may mean converting parking lot space to install drive-thrus or take-out windows. Franchisors Subway and Dunkin Donuts have both commented on their plans moving forward to incorporate drive-thrus and take-out windows into both existing and new locations to emphasize contactless pick up. Other modifications include designating certain parking lot spaces exclusively for third-party delivery service drivers or even converting parking lot space into outdoor dining space.

Before implementing changes like those discussed above at your business or throughout your franchise system, you should keep in mind a few legal considerations that may apply. First, commercial leases typically contain restrictions on how a leased space may be used (e.g. prohibiting use of outdoor space for food service). Therefore, before using your leased space differently, you should review your lease carefully. If a lease prohibits the way you’d like to use your space, you may consider negotiating your lease with your landlord. Given the shift in the market discussed above, landlords will likely be more amenable to working with you if it means the difference between keeping you as a successful, paying, tenant versus a vacancy.

Second, zoning restrictions could impact your plans. For instance, many cities are notorious for disfavoring drive-thrus and greatly restrict a business’s ability to install them. You should review applicable zoning ordinances before remodeling or adding on to your business location.

Finally, insurance policies may only cover the present use of your real estate. For instance, placing outdoor dining tables in a parking lot may not be covered by your current policy.  You should review your insurance coverage prior to remodeling or changing the way you are using your space. When in doubt, you should consult with your insurance provider to discuss your coverage and whether your policy needs to be modified.

If you’re thinking about either acquiring more real estate to expand your franchise system or changing the way in which you use your current real estate and have questions about the legal implications of doing so, feel free to contact me at kristen.harvilla@kentfranchiselaw.com or 215-751-2874.