Adjust Sublet Space Threshold Calculation to Protect Your Recapture Right

Your standard lease form may give you the option to terminate the lease and take back—or “recapture”—a space if the tenant wants to assign its lease or sublet all or any portion of its space. This way, you can relet the space (or the portion that was going to be sublet), presumably at a higher rent.

But a savvy tenant may demand that you limit your recapture right to only larger sublets. So it may demand that the sublet contain at least a certain square footage before you're permitted to exercise your recapture right. For example, if the tenant's space is 15,000 rentable square feet, the tenant may insist that the proposed sublet be at least 2,500 rentable square feet before you can exercise your recapture right. With a space threshold like this in place, the tenant can sublet a small portion of its space without having to worry that you'll take that portion away from it and the prospective subtenant.

If you must agree to a square footage threshold, try to diminish its effectiveness so you keep your recapture right as intact as possible. With the help of New Jersey attorney Marc L. Ripp, we'll give you two steps aimed at taking the sting out of the square footage threshold.

Two-Step Approach to Calculation

To diminish the effectiveness of the square footage threshold, adjust the way the threshold amount is calculated, says Ripp. To do that, follow these two steps:

Step #1: Total proposed and current sublets. Typically, you would check only the proposed sublet's rentable square footage to see if the threshold amount has been reached or exceeded. But to increase the odds that the threshold amount will be reached or exceeded for a proposed sublet, get the right to take into account the proposed sublet's rentable square footage plus the square footage of any portions of the space that the tenant is currently subletting, says Ripp.

This approach stops a tenant from trying to undermine your recapture right by subletting in increments—with each portion of sublet space falling below the size threshold, he points out. If all current and proposed sublet portions are aggregated, the tenant will have a much harder time keeping below the threshold amount.

Example: The threshold amount at which you may recapture the tenant's space is 4,000 rentable square feet. The tenant is already subletting 1,000 rentable square feet and is proposing to sublet an additional 3,000 rentable square feet. Neither sublet portion would trigger your recapture right. But both sublet portions together are 4,000 rentable square feet (1,000 + 3,000), which would trigger your recapture right for the second sublet.

Step #2: Presume expansion options are exercised. If the proposed subtenant or any current subtenant has an option to expand its sublet space, get the right to presume that each expansion option has already been exercised—even if it actually hasn't, says Ripp. You'll then use the amount of each expanded sublet space in your calculation to see if the minimum square footage threshold has been met or exceeded.

Example: A space is 10,000 rentable square feet. You agree that a threshold of 3,500 rentable square feet must be met or exceeded before you can exercise your recapture right. The tenant recently sublet 1,000 rentable square feet to a subtenant and gave the subtenant an expansion option for an additional 500 rentable square feet of space. Because the sublet involved only 1,500 rentable square feet (including the expansion option space), it didn't meet the square footage threshold. But now, the tenant proposes subletting another 2,000 rentable square feet to a second subtenant. The aggregated sublet spaces equal 3,500 rentable square feet (1,500 rentable square feet for the first subtenant and 2,000 rentable square feet for the proposed second subtenant). So you may recapture the portion that the tenant proposes to sublet to the second subtenant. If you couldn't have presumed that the expansion option was exercised, the tenant's aggregated sublet space would amount to only 3,000 square feet and the tenant wouldn't have met the minimum square footage threshold.

Add Lease Language

To get this two-step approach, add the following language to your assignment/subletting clause where it discusses your recapture right, says Ripp: CLLI0074

Model Lease Language

Notwithstanding anything contained herein to the contrary, if Tenant proposes to sublet any portion of the Premises, then Landlord agrees that it may exercise Landlord's Recapture Right with respect to such portion only if such portion contains at least [insert #] rentable square feet. For purposes of determining whether the aforementioned [insert #] rentable square foot threshold has been satisfied with respect to such portion, Landlord may:

a. Aggregate the rentable square feet of all portions of the Premises presently being sublet by Tenant to one or more subtenants; and

b. Presume that all expansion options contained in all present subleases and in the proposed sublease are exercised.

CLLI Source

Marc L. Ripp, Esq.: Counsel, The Gale Co., LLC, 100 Campus Dr., Ste. 200, Florham Park, NJ 07932; (973) 301-9500; MRipp@thegalecompany.com.