Recapture is a term used for the landlord's right to terminate a tenant's lease for all, or a portion, of the premises in order to prevent a sublease or assignment.
I saw this happen one time on the day before a business sale was expected to close. It was really the fault of the seller of the business who was the tenant in an office building. The buyer came to the landlord to let him know of the sale. The landlord referred the buyer to the sublease and assignment clause of the lease in which all subleases or assignments had to be approved in writing by the landlord. Furthermore, that clause gave the landlord the right to terminate the lease if he chose to do so.
In this case, the market rent for the office building had gone up by about 25% since the lease had been signed and there was very little vacancy in the submarket. So the landlord terminated the lease because he knew he could get more rent for someone else.
Of course, the buyer of the business needed a place to conduct business and he didn't have time to move. So he asked the landlord if he could lease the space. The landlord agreed but at a rental rate 25% higher. The business no longer had the same value since the expenses had gone up and the net operating income had gone down. So the buyer went to the business seller and demanded that the purchase price be reduced by the amount of additional rent. The seller accepted the deal and walked away with far less cash in his pocket than he had planned.
Now this situation could have been avoided in two ways. First, the seller of the business could have approached the landlord long before the day before the sale to determine his attitude about assigning the lease. He could have then used that information to plan the sale better and get a more accurate estimate of the business value. Someone should have been watching the lease or consulting their corporate real estate advisor.
Second, the business seller who was the tenant in the office building lease should have addressed the landlord's recapture right when he signed the lease in the first place. If that had been negotiated out of the lease years before, he would have kept the extra money he lost.
If you know of someone thinking of signing a lease, you might mention that they look at the sublease/assignment clause carefully. Or if you know of someone thinking of selling or buying a business, please tell them to read this clause of the lease carefully. Or better yet, have them contact their corporate real estate advisor.
Bob Gibbons is a Corporate Real Estate Advisor with Reata Commercial Realty, Inc. in Plano, Texas - a suburb of Dallas. You can reach him through his website at www.ReataCommercialRealty.com.
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