Negotiate Broad Right to Recapture Tenant's Dark Space

Commercial tenants typically want the right to “go dark”—that is, stop operating while continuing to pay rent—if their businesses aren't generating enough revenue. “Going dark” can save tenants the cost of stocking and staffing the space they rent. But if you give a tenant the right to go dark, you may want to carve out a recapture right for yourself—allowing you to take back the space and replace the tenant.

A space that's dark for a long period of time can affect other tenants and shoppers' perception of your center. On the other hand, depending on your market, finding a new tenant may be difficult, and a tenant that has had a chance to reorganize during a go dark period may emerge from that period stronger than before.

While an owner's right to recapture is a reasonable tradeoff for a tenant's right to go dark, a standard recapture clause in a lease form could be too narrow to protect you, allowing you only a short time to make decisions. Take steps to negotiate a broad recapture right that gives you leeway when exercising this option.

Set Favorable “Go Dark Period” and “Recapture Date”

Your recapture right can be triggered if the tenant notifies you with a “go dark notice” that it intends to go dark, or if it ceases operations in the space for a set period of time that you've specified in the lease—the “go dark period”—without sending you any notice. You can choose to exercise your recapture right when you get the tenant's go dark notice or when the go dark period ends. But first you must send the tenant a “recapture notice” saying that you intend to recapture its space. The lease will end on the “recapture date”—a set number of days after the tenant receives the recapture notice, explains Denver real estate attorney Neil B. Oberfeld.

You don't want your recapture right to be triggered too soon—for example, when the tenant closes for a couple days to take its semiannual inventory. Nor do you want the tenant to be able to cease operations for such a long period of time that it affects the overall business of the center—such as a year. A struggling tenant that has the right to go dark for a long period of time may waste the time or never intend to reopen. Follow these steps to set the “go dark period” and the “recapture date” so they are favorable to you.

Step #1: Limit operations hiatus. Make the tenant's go dark period so short that it clearly isn't meant to be permanent. Say in the lease that if the tenant has ceased operations at the space for a short period of time, such as 30 days, it will trigger your recapture right. If a tenant asks for a lengthy go dark period, try to limit the number of days it's proposing. Ask your attorney about adding the following language to your lease where it discusses the recapture date:

Model Lease Language

Tenant shall be deemed to have ceased operations in the Premises under the Recapture Right if there are no operations in the Premises for [insert #, e.g., 30] days (“Go Dark Period”).

Step #2: Set limits on permitted closings. Temporary closings may occur when a tenant has to comply with governmental regulations, do remodeling work, accommodate an assignee or subtenant, deal with damage caused by a casualty, or contend with a force majeure event—an act beyond its control, such as a hurricane or tornado. Make sure that temporary closings are limited and if the tenant exceeds that limit, the additional days will be in the calculation. Otherwise, the tenant could try to use a disaster as an excuse to stay closed for an unreasonable amount of time, notes Oberfeld.

Model Lease Language

Cessation of Tenant's operations as necessary for compliance with governmental laws, as a result of a casualty or condemnation, or in connection with any remodeling, assignment, or subletting, provided that such cessation does not exceed [insert #, e.g., 30] days in the aggregate, shall not be considered a failure to operate in the Premises and shall be exempted from the Go Dark Period.

Step #3: State that operations cease if portion of space is unused. Specify that the go dark period starts to run when the tenant or anyone else who was in the space has ceased operating out of any portion of it.

Model Lease Language

Tenant shall be deemed to be operating in the Premises under the Recapture Right only when Tenant or any assignee, subtenants, licensees, or concessionaires are using all of the space for business operations. If Tenant or any assignee, subtenants, licensees, or concessionaires stop using any portion of the space for business operations, Tenant shall be deemed to have ceased operations in the Premises under the Recapture Right.

Step #4: Give yourself unlimited time to exercise right. Allow yourself an ongoing right to notify the tenant that you are exercising your recapture right. As long as the tenant remains dark, the owner should have an unlimited time period to recapture the premises.

Model Lease Language

Landlord shall have the ongoing right to provide the Recapture Notice at any time after the Go Dark Period expires or Landlord's receipt of the Go Dark Notice, as long as Tenant has not reopened for business in accordance with the requirements of the lease prior to landlord providing such Recapture Notice.

Step #5: Set favorable recapture date. Make sure that your recapture date fits your estimated timeline for finding a new tenant for the space. If it's been easy for you to find tenants in the past, you may want to set the date as soon as 60 days from the date of the recapture notice. Or if you think you'll need more time, setting the date 90 days or more from the recapture notice could alleviate the stress of finding a new tenant for the space if it's been difficult to rent in the past. If you're going to give the tenant a cancellation window or a longer period of time to move out, make sure that you set your recapture date accordingly.

Step #6: Allow tenant short cancellation window. If your tenant asks for provisions that allow it to change its mind about going dark, you could agree to be flexible, but keep the withdrawal period short. Say in the lease that if the tenant sends you a withdrawal notice within a brief period of time—for example, 30 days—before the recapture date and then the tenant also starts operating before the recapture date, you won't be entitled to recapture the space and the lease will continue in full force. That way, you may get lucky and the tenant will start operating again.

Model Lease Language

If Landlord provides the Recapture Notice exercising its Recapture Right, Tenant shall have the right to elect to either withdraw its Go Dark Notice or commence operations in the Premises by delivering to Landlord notice of such withdrawal or commencement of operations (the “Withdrawal Notice”) within [insert #, e.g., 30] days prior to the Recapture Date. In the event Tenant delivers its Withdrawal Notice and commences operations in the Premises prior to the Recapture Date, the exercise of the Recapture Right shall be deemed withdrawn and this Lease shall continue in full force and effect.

Maintain Goodwill with Tenant

When broadening the recapture clause to your advantage, remember to be fair to your tenant. Maintaining the goodwill that you've cultivated with it is important. You may decide at the last minute to work something out so the tenant stays. And even if it leaves, you might have to deal with it again at some point in the future.

Being fair when exercising your right includes giving the tenant a reasonable amount of time to move out of the space after you have elected to recapture it. However, you also want to be able to re-rent the space or use it for whatever purpose you'd like to as soon as possible, so that you can avoid losing money on it. Oberfeld suggests giving the tenant 60 days or 90 days rent free after the recapture date to move all of its things out of the space. “That's a common arrangement with recapture rights,” notes Oberfeld.

Model Lease Language

Tenant shall have [insert #, e.g., 60] days after the Recapture Date to vacate the Premises in order to remove Tenant's furniture, fixtures, and equipment from the Premises, without rent or other charges due.

Insider Source

Neil B. Oberfeld, Esq.: Shareholder, Greenberg Traurig, LLP, 1200 17th St., Ste. 2400, Denver, CO 80202; www.gtlaw.com.

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