Right of Recapture

Many tenants are not contemplating the effects of a future lease transfer or assignment upon entering into a commercial lease agreement, for frequently their lease term spans a considerable number of years. As a result, certain assignment provisions of a commercial tenant’s original lease are left unconsidered until several years later when attempting to exercise that option. 

Given landlords’ incentive to limit their liability, assignment lease provisions are often drafted to grant the landlord with substantial rights regarding the possibility of future assignments. By not predicting a possible lease transfer at the time of contracting, tenants may inadvertently fail to negotiate these landlord-favorable contract sections to better protect their own interests.

One notable clause related to assignments involves the landlord’s “right of recapture” or, alternatively, a “recapture option.” This right of recapture gives the landlord the choice to deny a tenant’s proposed transfer or assignment and instead reclaim the premises to re-lease at the landlord’s discretion.

The following illustrates the type of language used in a “right of recapture” section:

“Landlord shall have the option, by giving written notice to Tenant within thirty (30) days after receipt of any Transfer Notice, to recapture the Subject Space. In the event such option is exercised by Landlord, this Lease shall be canceled and terminated with respect to the Subject Space…”

In other words, if a tenant notifies landlord that he or she intended to make an assignment –let’s say, for example, as part of a sale of his or her business –under the original lease, the landlord would be able to deny the transfer and “recapture the Subject Space.”  the landlord retained this option to recapture the premises and reject any proposed assignment, a tenant’s future sale of his or her business could be jeopardized entirely!

This is not to say that a landlord’s right of recapture is always exercised to a tenant’s detriment. In fact, as the second bolded phrase above demonstrates, if a landlord does choose to exercise this option, the tenant benefits by being relieved of further liability under the lease, for the effect of the landlord’s recapture is cancellation of the original lease.

Because the circumstances of each tenant are invariably different, it is evident that a comprehensive understanding of assignment provisions proves paramount for commercial tenants. Even in the case of savvier tenants who may have envisioned the consequences of a future assignment when first executing their lease agreement, the effects of assignment provisions can have a profound effect for the tenant, if not addressed appropriately. 

Therefore, conferring with a knowledgeable attorney or representative can certainly alleviate any potential unforeseen issues surrounding lease transfers and assignments, and we surely recommend consulting counsel for lease review at any stage of the process!