LEASE AGREEMENT REFERENCE GUIDE 670: RECAPTURE CLAUSES REVISITED $24.95
RECAPTURE CLAUSES REVISITED
Note: The California case and statute contained in this LARG are illustrative of the developing case law and legislation that pertain to recapture clauses.
This LARG focuses upon recapture clauses. The first section discusses the Carma case, a California decision that voided a recapture clause. The second piece looks at a new California statute that, effective January 1, 1990, governs commercial lease transfers in California. Next is a section prompted by the Carma case which reviews the ingredients in recapture clauses. Finally, the Lease Clause Critique discusses the evolution of recapture clauses, and contains a sample recapture clause for an office lease. Please note that the discussion of the California cases and statutes pertaining to recapture clauses does not comprehend specific changes or modifications to case law or statutes after 1989. The purpose of this LARG is to provide a useful discussion of the issues that affect the recapture clause in commercial real estate leasing.
The Recapture Clause—A Useful Landlord Tool
This Lease Clause Critique reviews the basics of the recapture clause. Notwithstanding the sentiments of the California Court of Appeal, the recapture clause has been one of the most effective devices available to landlords to control their space and to control proposed lease transfers by tenants.
There is also a critical difference between the lease clause below and the one that was voided by the California Court of Appeal--the one that appears below does not contain a right of termination in favor of the landlord that is triggered by the tenant's proposing a transfer and requesting the landlord's consent. Such a termination by the landlord causes a real hardship for the tenant, and invites the court to use its broad equitable powers. As the saying goes, hard facts make bad law.
During the 1970s, many landlords saw their tenants making large amounts of money by assigning or subleasing their leased space. Landlords have historically taken the position that money made from the real estate should properly go into the pockets of the owner, rather than those of the tenant.
A recapture clause allows the landlord to "recapture" a portion of the premises proposed by the tenant to be assigned or subleased by either terminating the lease with respect to that portion of the premises, or taking a sublease back from the tenant as to such space. Many aggressive recapture clauses allow the landlord to recapture the entire premises even if only a portion of the space is proposed to be assigned or sublet by the tenant.
This puts the landlord in a good position since he has the option but not the obligation to take the space back and can transfer it to a third party if it is profitable to do so. Note that the clause appearing below gives the landlord the right to take the space back at the rent the tenant is then paying under the original lease. This effectively means that the landlord will benefit from any increase in market rentals if it chooses to recapture the space.
Tenants frequently bargain for a share of any market uplift in recapture clauses, and often get such participation. Sharing such uplift with the tenant may make good business sense for the landlord, since it may enhance the cooperation of the tenant in the event of a transfer and since it may make the rest of the onerous provisions present in the assignment clause more acceptable to the tenant.