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LEGAL DICTIONARY

Recapture Clause

What Is a Recapture Clause?

A recapture clause is a commercial lease provision that allows the landlord to retain possession of a property before the lease expires under certain conditions. The details of the recapture clause are negotiated as part of the lease agreement.

The typical circumstances that trigger the use of the clause are the tenant’s sales falling below a specific number or the tenant subleasing the property to a third party.

A landlord recapture right allows the owner to maintain control over the tenant mix in their building. The right to recapture a property also allows the owner to benefit from an upswing in property market values.

Recapture Clause in Percentage Leases

In a percentage lease, the landlord and tenant agree to a base rental price plus a percentage of sales revenue. This arrangement can work well for the tenant since the base rent is usually below market price.

However, the landlord can invoke a recapture clause if the tenant’s revenues fall below an agreed-upon level. The landlord may retain possession of the property in hopes of attracting a tenant with higher sales. In these cases, the recapture clause helps landlords maintain their bottom line in terms of revenue for the property.

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Recapture Clause in a Sublease Agreement

Another common trigger of a recapture clause involves the tenant notifying the landlord of their intention to create a sublease agreement for the property with a third party.

This situation might occur when a poorly-performing business seeks to sublet its property rather than default on its lease. If the lease has a recapture clause, the landlord has the right to terminate the lease and deal with the new tenant directly.

When a landlord seeks to terminate a lease through the use of a recapture clause, they must give recapture notice through the use of a written lease termination letter. The letter must closely follow the terms of the clause stated in the lease agreement.

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What information should a recapture clause include?

The recapture notice should state that the landlord intends to recapture the space according to the provisions of the signed lease agreement. The information should include a “recapture date,” which follows a set number of days after the tenant receives the notice. This date should be one that allows the landlord enough time to find a more suitable tenant.

The language used for recapture clauses can be complicated for both landlords and tenants. To avoid an unexpected recapture or an illegal recapture, all parties must be clear on the wording and their rights before signing a lease agreement with this type of provision.

For example, the provision should specify whether the tenant is permitted to sublet any percentage of the space without activating the recapture clause. The clause also should allow the tenant to withdraw the request if the landlord responds to the request with an intent to recapture the property.

Helpful Resources:

Investopedia - Recapture Clause Definition

Realized 1031 - Recapture Clause Definition

Commercial Lease Law Insider - Right to Recapture

What Is a Recapture Clause?

A recapture clause is a commercial lease provision that allows the landlord to retain possession of a property before the lease expires under certain conditions. The details of the recapture clause are negotiated as part of the lease agreement.

The typical circumstances that trigger the use of the clause are the tenant’s sales falling below a specific number or the tenant subleasing the property to a third party.

A landlord recapture right allows the owner to maintain control over the tenant mix in their building. The right to recapture a property also allows the owner to benefit from an upswing in property market values.

Recapture Clause in Percentage Leases

In a percentage lease, the landlord and tenant agree to a base rental price plus a percentage of sales revenue. This arrangement can work well for the tenant since the base rent is usually below market price.

However, the landlord can invoke a recapture clause if the tenant’s revenues fall below an agreed-upon level. The landlord may retain possession of the property in hopes of attracting a tenant with higher sales. In these cases, the recapture clause helps landlords maintain their bottom line in terms of revenue for the property.

Get a Lease Agreement Here

Recapture Clause in a Sublease Agreement

Another common trigger of a recapture clause involves the tenant notifying the landlord of their intention to create a sublease agreement for the property with a third party.

This situation might occur when a poorly-performing business seeks to sublet its property rather than default on its lease. If the lease has a recapture clause, the landlord has the right to terminate the lease and deal with the new tenant directly.

When a landlord seeks to terminate a lease through the use of a recapture clause, they must give recapture notice through the use of a written lease termination letter. The letter must closely follow the terms of the clause stated in the lease agreement.

Get a Sublease Agreement Here

What information should a recapture clause include?

The recapture notice should state that the landlord intends to recapture the space according to the provisions of the signed lease agreement. The information should include a “recapture date,” which follows a set number of days after the tenant receives the notice. This date should be one that allows the landlord enough time to find a more suitable tenant.

The language used for recapture clauses can be complicated for both landlords and tenants. To avoid an unexpected recapture or an illegal recapture, all parties must be clear on the wording and their rights before signing a lease agreement with this type of provision.

For example, the provision should specify whether the tenant is permitted to sublet any percentage of the space without activating the recapture clause. The clause also should allow the tenant to withdraw the request if the landlord responds to the request with an intent to recapture the property.

Helpful Resources:

Investopedia - Recapture Clause Definition

Realized 1031 - Recapture Clause Definition

Commercial Lease Law Insider - Right to Recapture