The Importance of Recapture Provisions in Commercial Leases

In the commercial lease setting, assignment and sublease provisions are often heavily negotiated to determine the scope of, and conditions upon which, the landlord can withhold its consent to an assignment or sublease request. Frequently, little attention is paid to “recapture” clauses, which address the landlord’s ability (when approached with a tenant’s proposed assignment or sublease request) to terminate the lease as to some or all of the premises and recapture (or take back) the space. This scenario often comes into play when a tenant plans to sell its business which requires an assignment of the lease to the buyer, or when the tenant plans to downsize and would like to sublease some of its extra space.

A savvy tenant with sufficient bargaining power can avoid such a harsh recapture result by negotiating into the lease

  1. the ability to rescind/withdraw its assignment or sublease request if the landlord elects to exercise its recapture right,
  2. limiting the recapture right to requests to fully assign the lease or to sublease more than a certain percentage of the space,
  3. limiting the recapture right to assignments or subleases to unrelated third parties (and perhaps further limiting it where the assignment is in connection with the sale of the tenant’s business and the assignee will continue to operate the tenant’s business), and/or
  4. clarifying that the tenant is released from full liability as to the space recaptured by the landlord.

Even if the lease provides that the landlord may not unreasonably withhold, condition, or delay its consent to an assignment or sublease request, without language in the lease allowing the tenant to rescind/withdraw such a request and/or limiting the circumstances in which the landlord can recapture the space, a landlord could attempt to use its recapture right to circumvent this reasonableness of consent standard and in essence arbitrarily decide the issue, and in some instances, even seek to recover expenses of separating/renovating the space if the landlord takes back a portion of the space.

In the current commercial leasing environment with high vacancy rates, having the ability to rescind/withdraw an assignment or sublease request to avoid the harsh result of a recapture provision is critical to a tenant, just as having a clear and broad recapture right is important to the landlord. It is prudent that the parties each seek the guidance of an experienced real estate attorney when addressing such issues. If you have questions regarding recapture provisions or commercial lease related issues, please contact Josh Pope or one of the attorneys in Montgomery Purdue PLLC’s Real Estate Department.

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