Definition
A recapture clause is a lease provision that gives the landlord the right to terminate the lease or reclaim all or part of the leased premises if the tenant seeks to assign the lease or sublease the space.
How It Works
- Tenant requests landlord consent to assign or sublease.
- Instead of approving the transfer, landlord may elect to recapture the space.
- Lease is terminated for the recaptured portion.
- Landlord may re-lease the space at market terms.
Purpose
- Allows landlord to regain control of valuable space.
- Prevents tenants from profiting from below-market leases.
- Maintains tenant mix and credit quality.
Example
A tenant is paying $25/SF under a long-term lease. Market rents rise to $35/SF.
The tenant attempts to sublease at $35/SF. The lease includes a recapture clause.
The landlord elects to terminate the lease and re-lease the space directly at the higher market rent.
Partial vs. Full Recapture
- Full Recapture: Entire leased premises may be terminated.
- Partial Recapture: Landlord may reclaim only a portion of space.
Recapture vs. Profit Sharing
- Recapture Clause: Landlord reclaims space instead of approving transfer.
- Profit Sharing Clause: Tenant shares excess sublease profits with landlord.
Landlord Considerations
- Captures upside in rising markets.
- Maintains control over occupancy strategy.
- Requires careful notice and timing procedures.
Tenant Considerations
- Limits exit flexibility.
- Reduces ability to monetize favorable lease terms.
- Negotiation of carve-outs is common.
Underwriting Implications
- Strong recapture rights enhance landlord control.
- May affect tenant retention.
- Important in evaluating below-market leases.
Common Pitfalls
- Ambiguous recapture timing language.
- Failure to follow notice procedures.
- Overly aggressive recapture harming tenant relationships.