Under some circumstances recapture provisions can offer substantial benefits to both landlord and tenant. The tenant is relieved of its future performance obligations, and the landlord can put the premises to better use, in a direct relationship with a new tenant, perhaps gaining rent at a newly higher market rate or a lease for a longer term. In the situation where the tenant has outgrown its space, or needs to move to a smaller space and determines to offer the lease for assignment or the premises space for sublease, the tenant may have to reconcile this business decision with a cost of transfer. Like all lease provisions, recapture provisions can contain traps for the unwary.
In negotiating a new lease, landlords and tenants both would do well to pay particular attention to the language of the recapture provision that describes the triggering event. Landlords will want to have some certainty as to whether or not the tenant has triggered the provision. A well drafted recapture provision will allow the landlord the option to dispossess the tenant of the premises and avoid allegations of breach of the lease. Provisions often found in retail leases allowing the landlord to recapture if the tenant’s business “goes dark” for a certain number of days will require very specific definitions of the various events under tenant’s control that could trigger the recapture. In addition, tenants will want a certain time limit on how long the landlord must wait, or may wait, before exercising its right.
With a typical office recapture provision – a right to recapture when the tenant proposes an assignment or a sublet – tenants will want to limit the level of effort and expenditure required on tenant’s part before the landlord’s recapture right is ripe. A lease that requires the tenant to engage a broker, advertise the space, find a subtenant and fully negotiate the sublease before the landlord must make its determination to recapture could have a severe chilling effect on the tenant’s ability sublease. The landlord in this example will want the recapture provision to include adequate time for due diligence on the proposed assignee or subtenant and any potential new tenant before it has to make a decision to recapture the space.
Careful consideration of this provision during lease negotiation will, if actioned on a later date, provide both parties with greater certainty over the course of the lease term.