Don’t Let Recaptured Space Dig into Your Profits

February 2, 2017
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Many owners negotiate a recapture right in their leases that they can exercise if a tenant intends to assign its lease or sublet all or part of its space. And this could include a profit-sharing clause that will require the tenant to pay all or part of any profit it makes from an assignment or a sublet if you decide not to recapture the space.

But if you’re not careful, those two otherwise pro-owner clauses could possibly backfire on you and end up costing you money. Here’s what could happen. Suppose, after a tenant notifies you that it intends to assign its lease or sublet all or part of its space to a third party, you decide to exercise your recapture right. You force the tenant to instead assign its lease or to sublet all or that portion of the space to you directly. This way, you can sublet the space to any third party (after the tenant assigns its lease to you). Or you can sub-sublet the space to any third party (after the tenant sublets its space to you). But because the wording in a typical assignment or sublet profit-sharing clause requires you and the tenant to share any profit made, the tenant might argue that you must share your profits with it after the recapture.

To protect your wallet, say in the lease that once you exercise your recapture right, the tenant won’t be entitled to any of the profit you make from your sublet or sub-sublet. To do this, add the following language to your lease where it discusses assignment/sublet profit-sharing:

Model Lease Language

If Landlord exercises its right to recapture any or all of the Premises pursuant to the provisions of Clause [insert # of recapture clause] hereof, in no event shall Tenant be entitled to any proceeds derived from or relating to (directly or indirectly) any assignment of this Lease, or any sublet or sub-sublet by Landlord of any or all of the Premises.