Dental and Medical Counsel Blog

Understanding the Recapture Clause in Lease Agreements

September 2, 2020
Recapture Clause

Signing a lease agreement is one of the first steps in opening your practice. It is not as cut and dry as residential lease agreements and there are some things you need to be aware of before signing. In other blogs and articles, we've written about the different types of commercial lease agreements and how to avoid breaching your lease. We've also discussed the importance of exclusivity in your lease agreement, which is especially important if you want to make sure direct competitors aren't in the same building. The next big topic is the recapture clause.

A recapture clause is essential to understand in any medical or dental practice as it can impact your ability to sell your business or receive maximum value for it. If at all possible, they should be removed from the agreement during lease negotiations and many times we recommend that you don't sign a lease with a recapture provision.

What Is a Recapture Clause?

The recapture clause can make it impossible or nearly impossible to sell the practice. In essence, this clause allows the landlord to cancel the lease rather than assigning it to a new buyer or doctor. Some landlords even have a clause stating that they are entitled to a percentage of the profits from the sale of the business. A lease with this type of stipulation should never be agreed to and may be even illegal.

A recapture provision typically states that the practice owner must notify the landlord before selling the practice. That’s not controversial. The landlord then has the right to terminate the lease, rather than assign it to your buyer. This can leave you in a position where you need to find a new location before you can sell your existing practice or the buyer has to move the practice after buying it which can compromise the entire deal.

The recapture clause can also indicate that the landlord has a right to terminate the existing lease and renegotiate the lease with the new buyer. For the seller, this can mean that the closing price of the practice may be negatively impacted because the buyer may stipulate that the increased lease price needs to come off of the purchase price. The buyer may also decide against buying depending on the rental cost discrepancy.

How to Avoid the Pitfalls of a Recapture Clause

Recapture clauses are standard in commercial lease agreements but that doesn’t mean you should agree to it. This is why it's important to have legal counsel with experience in these types of real estate dealings to help you achieve a beneficial outcome from your lease negotiation. For a dental or medical practice, the ability to sell your practice for a fair market value is essential to protect your investment. A lawyer with experience in this area can help negotiate the leasing details with your practice's best business protection interests in mind.

Your lawyer will work to negotiate the best possible leasing agreement for your interests so that the landlord cannot deny your ability to sell and profit from the business you've spent years building. 

If you'd like more information about the recapture clause or any other scenarios that negatively impact your commercial lease, download our whitepaper, The Top 10 Pitfalls to Avoid with Your Dental Lease. Additionally, if you have questions regarding your lease or need help reviewing your lease agreement, contact the experts at Dental & Medical Counsel.

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