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Recapture Clause in Commercial Real Estate

Recapture Clauses in Commercial Leasing

In commercial leasing, a recapture clause permits a landlord to terminate a lease early, and may also allow them to demand all or part of the remaining lease payments immediately. Recapture clauses can be triggered by a variety of events, but are are most often activated when a tenant closes their business and attempts to sublease the property. In many situations, a recapture clause can be triggered simply by a request to sublease the property to another tenant-- even if the tenant has lease assignment rights written into their contract. Unfortunately for commercial tenants, recapture clauses are often worded broadly, as to give the landlord substantial leeway to terminate the lease.

Recapture Clauses and Percentage Leases

Recapture clauses are especially common in percentage leases, in which a landlord receives a specific percentage of a tenant’s revenue in addition to base rent. In these cases, a landlord may be able to trigger a recapture clause if a tenant falls below a specific revenue level, as this directly affects the monthly rent that the landlord receives. In this case, the landlord generally hopes that they can find a new, more profitable tenant to sign a percentage lease, in the hopes of increasing their rental income.

Recapture Clauses and Lease Repayment

In addition to terminating the lease and taking possession of the property, many recapture clauses also stipulate that the tenant must immediately pay the entire remaining amount of the lease, even though they no longer occupy the property. In the most extreme scenarios, a landlord may even attempt to be reimbursed for tenant improvements, rental discounts, and other expenses. However, many recapture clauses are significantly more lenient, and may only require that the tenant pays an amount that approximates the landlord’s cost to re-lease the property to another tenant. Due to the significant variations in recapture clauses, commercial tenants should be extremely careful before signing a lease with a recapture clause. In particular, tenants should make sure to fully understand the exact circumstances under which a landlord can terminate their lease, and, if the lease is terminated, what exactly they, the tenant, will be liable for.

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