Recapture Clause

What Is a Recapture Clause?

A recapture clause refers to a lease provision common in commercial properties that allows the landlord to terminate a lease and retain possession of a property.

How a Recapture Clause Works

A recapture clause refers to a stipulation in a contract that allows the seller of an asset to take the asset back under certain conditions. It is a common component of commercial real estate leases, as opposed to residential property leases. In such a lease, the clause grants a landlord the right to take back possession of a property prior to the expiration of a lease. The details of the clause are negotiated by the lessor and the lessee and included in the lease agreement. The most important detail of a recapture clause is the so-called trigger — the event that allows a landlord to initiate recapture.

Assignment and Recapture Clauses

A common trigger is a tenant’s intention to assign the property to a third party via a sublease. For this reason, the recapture clause is closely related to the lease’s assignment clause, and the two are typically negotiated together. Landlords prefer to leave the wording of a recapture clause vague to allow themselves flexibility when a tenant requests permission for assignment.

If a tenant business is performing poorly and intends to close, it may seek to sublet the rented property to another business rather than default on its lease with the landlord. The landlord, however, would typically prefer to initiate a new lease with the new business directly. When the first tenant informs the landlord of its intent to assign the property to the new business, the landlord might choose to invoke the lease’s recapture clause.

Recapture Clauses in Percentage Leases

A second common trigger arises from a landlord’s interest in the tenant maintaining a certain level of revenue. In a percentage lease, the landlord and tenant agree to a base rent plus an additional percentage of revenue to be paid to the landlord. This can be advantageous to the tenant since the base rent is typically below market rate and the marginal rent is only due if sales perform well.

A percentage lease allows the landlord to invoke a recapture clause when the tenant business’ revenues dip below a certain level. This is the trigger event. In the case of a shared property such as a shopping mall, a landlord will recapture a property in the hope that they can bring in another tenant with higher revenues. This helps the landlord’s bottom line and may also bring in additional business for the landlord’s other tenants.