Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Recapture Clause

What it is:

A recapture clause is language in a contract that allows a person or entity to take back an asset under certain conditions.

How it works (Example):

Let's say John Doe owns the ABC Shopping Center. He leases retail space to Company XYZ. The lease says  Company XYZ will pay 3% of its sales to John Doe as rent every month for a minimum of $5,000 per month. In other words, Company XYZ has to have revenues of at least $167,000 a month.

Company XYZ only does $100,000 a month. Because the lease has a recapture clause, John Doe can terminate the lease and take back the retail space from Company XYZ. This allows him to get a better-performing tenant in the space rather than having to suffer through the entire term of the lease with a tenant that doesn't generate enough income for him.

Why it Matters:

Recapture clauses are most common in commercial leases, but they can be in any sort of contract in which an asset exchange takes place and the buyer may want the option to buy back the asset later.